Nov. 4 (Bloomberg) -- Ireland had its credit downgraded two levels by Fitch Ratings, which cited a widening budget deficit and the rising cost of bank-rescue measures.

The rating was reduced to AA- from AA+ with a “stable” outlook, the company said today in a statement. Fitch cut the grade from the highest AAA level in April. The downgrade puts Ireland’s rating at the same level as Italy and Cyprus.

Ireland’s budget deficit is set to widen to 12 percent of gross domestic product this year, according to government forecasts, four times the European Union limit, as an economic slump erodes tax revenue and pushes up welfare spending. At the same time, the government is setting up a so-called bad bank that will spend 54 billion euros ($80 billion) buying toxic loans from the country’s financial institutions.

The downgrade “reflects the severity of the decline in nominal GDP and the exceptional rise in government liabilities,” Chris Pryce, a Fitch director in London, said in the statement. “The breadth and depth of the country’s banking sector problems have substantially increased sovereign risk.”

The difference in yield, or spread, between 10-year Irish debt and the German equivalent was little changed at 145 basis points today. It reached 284 basis points in March.

Standard & Poor’s and Moody’s Investors Service reduced Ireland’s sovereign ratings earlier this year.

To contact the reporter on this story: Fergal O’Brien in Dublin at fobrien@bloomberg.net

Last Updated: November 4, 2009 07:12 EST