Left to right: Finance minister Brian Lenihan, Fergus Murphy of EBS, Irish Nationwide's Michael Fingleton, David Drumm (standing) of Anglo Irish Bank, Bank of Ireland's Brian Goggin, Denis Casey of IL&P and AIB's Eugene Sheehy

Within a few hours last Tuesday it was clear who would shoulder less risk over the next two years and who would to have to shoulder more. Credit default swaps (instruments that investors buy to insure their bonds) for the Irish government doubled in just a few hours, hitting a record of 60 basis points.

While Ireland remains in the AAA club reserved for major western economies, the deterioration in the credit default swaps heralds an undeniable drop in the creditworthiness of Ireland Inc. Credit default swaps for countries barely move most weeks, nudging up or down by a basis point or two, but last week's decision left Ireland trailing a whole host of other EU nations in terms of creditworthiness.

We have been perceived as a higher risk (in terms of bond default) than countries such as Germany, France, the Netherlands and Norway for quite some time, but this decision pushed our creditworthiness below that of Spain, a highly symbolic milestone.

As this reversal was taking place, credit default swaps for the Irish banks plummeted, indicating a marked improvement in their ability to pay back debt.

While the banks move into a different bracket of creditworthiness, Ireland's position has deteriorated, albeit around the fringes. The ratings agencies last week affirmed our AAA economy, but raised some concerns.

S&P said Ireland was also in healthy shape because it was not pumping any cash directly into any Irish bank. But it added a caveat: "Given that Ireland has guaranteed an estimated €400bn worth of deposits and debt, if any of the Irish banks fail, the largest of which has funding from these sources equal to around 90% of GDP, the sovereign could end up facing a substantial payout and a significant increase to its debt.''.

Ireland had a national debt of €37.6bn at the end of last year, although this looks set to increase sharply. Most of this (€31bn) comes from bonds quoted on the Irish stock exchange. Any downward pressure on Ireland's credit rating would immediately make future debt more expensive to service.

Changes to credit ratings for western economies happen rarely, but to get a sense of which way the winds are blowing most market participants tend to look at the credit default swap market.

Ireland's debt-to-GDP ratio is the third best in the eurozone at 25.4%. We have worked hard to get to that point. But in the highly unlikely event of widespread bank failures, this would rise to a ruinous 243%. Even a small uptick in the debt-to-GDP ratio has a direct impact on spending options in Ireland, as your borrowing is either circumscribed or made more expensive. As NCB said last week, increased debt means certain public investments may be "crowded out".

Already Japanese rating agency R&I plans "to review Ireland's rating after considering the economic forecast that will be announced with the fiscal 2009 budget and other factors". Others may remain relaxed about Ireland fiscal strengths, but there is always a but.