Finance minister Brian Lenihan wants the bill for Nama to be excluded when the ratings agencies are calculating government debt

By early summer all three main international ratings agencies had stepped in to strip Ireland of its prized AAA rating. Gaining membership of the AAA club means joining the largest, richest and most financially secure governments – at least as perceived by analysts at agencies, such as Fitch Ratings, Standard & Poor's and Moody's. The agencies rate such countries, or so-called sovereigns, as the least likely to skip an interest repayment on their bond debts.

But the prize, won for the first time eight years ago, was snatched back after less than a year of fiscal stress because the Irish economic slump will be so much steeper than elsewhere and the bill for saving the Irish banks that much larger.

Debt agency the National Treasury Management Agency was able to boast as recently as the summer before last that Ireland was among a group of ten European countries, including tiny Luxembourg, to hold the coveted AAA rating.

But this spring Ireland not only dropped from the top flight but fell precipitously two leagues lower, to join Slovenia, a recent entrant into eurozone. It was the equivalent, in terms of sovereign rankings, as a team competing in a Champions League final one year only to drop into the lower reaches of the Europa League.

Worse, the ratings agencies have put Ireland on notice that it could slip again if the economy fails to improve in the coming years.

It's no surprise then that the annual interest rate that Ireland must pay to service its debt pile soared to 6% (for 10-benchmark year bond debt that will need to be paid in full in 2019). The interest rate was almost double what the German government needed to pay.

In recent weeks, matters have considerably improved: the Irish interest rate fell to 4.5% and the spread or premium over Germany narrowed dramatically to less than 1.5 percentage points.

Unfortunately, the debt rating experts say that, despite the narrowing of market spreads, Ireland is unlikely to regain or even improve its credit score anytime soon.

"The pace of the increase in debt is significantly higher in Ireland and its ability to deal with a severe and large shock is limited," said Brian Coulton, global economics chief and head of sovereign ratings for Europe, Middle East and Africa at Fitch Ratings. "Ireland faces a very severe deficit going forward. The Irish economy is going through a much larger adjustment. The deficit risk is much larger as a result. The problems of the Irish banking sector are more severe than those in the UK and the Irish government does not have the flexibility of policy that a AAA sovereign has" to absorb the costs of cushioning the economy against the slump, said Coulton.

His forecasts for national debt here bear out the blunt assessment. This year Irish sovereign debt will climb to 77% of GDP, approximately €131bn, from just 25% in recent years.

Next year, add in the discounted loans the National Asset Management Agency (Nama) will buy from the five banks, and the debt pile climbs to 115% of GDP, or about €180bn. Fitch predicts Irish sovereign debt will peak in 2012, at 118% of GDP, suggesting that taxpayers face paying the costs of a huge interest bill on about €190bn of gross debt for many years before economic growth or, possibly, early Nama sales of property assets, pares the taxpayers' debt burden.

Debts in all other European countries will also rise but Ireland, for the size of its economy, faces the toughest test. In the next two years it will match Italian levels of debt, which Fitch predicts will also grow to 118% from about 105%.

In short, Ireland will break records for plunging deeper into debt in the shortest possible time of any sovereign state in recent decades. Fitch predicts that, by 2011, British debt will peak at 90% of its GDP, France's debt will rise to 86%, Germany's will reach 85%, and the debt level in Spain, which is often bracketed with Ireland as a troubled eurozone economy, will peak at only 75%.

Even Latvia, which comes the closest to sharing the severity of Ireland's economic shock, at 100% of GDP, will have a lower debt ratio than Ireland's in 2012, according to the Fitch estimates.

Coulton said it is right to include the cost of the bonds Nama will issue to the banks in the Irish debt bill because the wider market correctly sees it as a liability facing taxpayers.

The Department of Finance has argued that the Nama bill should not be included because the transfer of loans out of the banks is not a market transaction. It hopes to persuade Eurostat that measurements of Irish government debt should exclude the discounted bill Nama will pay for the loans.

Britain, where debt is also surging, although also under a warning, remains paradoxically in the AAA club. It seems that the ratings agencies have given it the benefit of the doubt. Belgium, which started off with a big debt burden, and Spain, whose property and economic woes are severe, both remain at AA+, a notch above Ireland's.

If Irish sovereign rates are falling, do the ratings matter in the first place?

It appears that holding or losing the top AAA rating will not automatically make it more or less expensive for Irish taxpayers to raise money. Some types of investors will hold only certain types of the highest-grade sovereign debt paper, and, generally, the bigger the demand there is for the debt paper, the lower the annual interest payments a debt agency such as the NTMA will have to pay out on behalf of its taxpayers to borrow money.

However, Irish sovereign interest rates may already have closed in on German rates as much as they can. Spreads are unlikely to narrow further, analysts say, and a rerating of Ireland by the agencies would help if the Nama process is seen to run smoothly.

"It is hard to say what the spread should be fundamentally. But it will not return to what it was before the crisis because before the crisis the spread was not normal. We are not going to see a return to that 'normal'," said Ben May, economist at London's Capital Economics.

But there is hope for Ireland in the experience of Finland and Sweden, countries which suffered economic misery in the 1990s when their property bubbles burst. In this current global crisis, their peak debt will reach only 33% and 37% of GDP respectively, among the lowest in the world. They retain membership of the AAA club.

Near debt experience

The AAA players and their prospects of staying in the top flight: Austria stable, Britain 'negative', Denmark 'stable', Finland 'stable', France 'stable' , Germany 'stable', Luxembourg 'stable', Netherlands 'stable', Sweden 'stable'.

The AA+ players and their prospects of staying in league two: Belgium 'stable', Spain 'stable'

The AA players and their prospects of staying in league three: IRELAND 'negative', Slovenia 'stable'

The A+ players and their prospects of staying in league four: Cyprus 'stable', Italy 'stable', Portugal 'stable', Slovak Republic 'stable'

Other leagues: Hungary ('BBB– negative'), Bulgaria ('BBB– negative'), Croatia ('BBB– negative'), Lithuania ('BBB – on watch 'negative'), Romania ('BB+ negative'), Latvia ('BB negative')

Data: S&P