Ireland's foreign currency credit rating has been upgraded by the Standard & Poor's credit rating agency. The move will make it easier for the authorities to sell Irish issued debt after monetary union. But Ireland still lags behind the larger EU countries in the quality of its debt, according to S&P.

According to the agency, an upgrade to the top AAA rank is possible if the Government cuts debt and then maintains it at modest levels during a business downturn.

The agency has confirmed that both Ireland's foreign and local currency credit ratings have converged at AA+.

The previous local and foreign currency ratings were AAA and AA respectively.

The agency has decided that the local and foreign currency ratings for all participants on monetary union should be the same. It has also affirmed its A1+ short-term credit rating for Ireland.

In a statement, S&P said it did not expect the sovereign states within EMU to be of the same credit quality because there were significant economic and fiscal factors still distinguishing them.

Of the 11 countries which last weekend agreed to join monetary union on January 1st, 1999, Austria, France, Germany, Luxembourg and the Netherlands will be rated AAA.

Belgium, Ireland, Finland, Spain, Italy and Portugal are rated in the AA range, S&P said, for both local and foreign currency bonds.

The top AAA rating represents the lowest risk of default and commands the highest price from investors.

Earlier this week, rating agency Moody's Investors Service also adjusted its EMU sovereign ratings, which will be subject to a AAA ceiling.

Individual government ratings can be below that, Moody's said. Under Moody's criteria, Belgium, Italy, Portugal and Spain still have individual government ratings below AAA, in the AA range.

S&P said Ireland's ratings were supported by our improved fiscal position, which had allowed us to become founding members of the single currency.

It also cites an open export-oriented and increasingly diversified economy as well as sustained economic and employment growth to justify the ratings.

The third factor supporting the ratings is our favourable competitive position, with low inflation and a national wage agreement which keeps labour costs in check.

However, the ratings are still constrained by the vulnerability of a small economy and in particular a per capita income less than the average of the other AA rated countries as well as a substantial public debt burden. While Ireland's actual rating has improved, the outlooks for Finland, Spain and Italy have also been upgraded. Both Finland and Spain have been upgraded from stable to positive, while Italy has moved to stable from negative. Ireland has remained unchanged at stable.