Moody’s has downgraded Ireland’s rating to junk status.

Last night, the credit rating agency said it downgraded Ireland’s government debt one notch from Baa3 to Ba1. The outlook on the ratings remains negative, which means a further downgrade is still possible.

The move came as a blow just hours after Ireland was optimistic that Europe had taken moves which would help it out of the financial crisis.

Moody’s said it decided to downgrade the debt because of the growing possibility that a second round of financing by the EU and IMF will be needed at the end of 2013.

The agency said it is possible that Ireland will not be able to return to the markets at the end of the current EU/IMF bailout programme in 2013.

It also said that it expects some level of private sector creditor participation in any further bailouts.

“The prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt. This is a key factor in Moody’s ongoing assessment of debt-burdened euro area sovereigns,” the agency said in a statement.

Moody’s noted Ireland’s efforts at fiscal consolidation but added that risks remain because of the weakened economy.

Responding to the statement from Moody’s, the National Treasury Management Agency (NTMA) said the situation in the euro area is “evolving rapidly” and that there are many positive developments for Ireland.

It also pointed out that Ireland retains investment-grade status with the other rating agencies, such as Standard & Poor’s and Fitch.

However, markets are expecting a sell-off of Irish bonds today as a result of the announcement as many investors will hold investment-grade bonds.

Earlier this week, the EU called on a ban on credit rating agencies making downgrades on countries working under bailout programmes.

Portugal was downgraded to junk status, without warning, last week. Ireland, Greece, and Portugal are now all sitting down in junk status.

Update: January 18, 2014

Ireland is on the up. Rating agency Moody’s has upgraded Irish government debt from junk status to investment grade. It is a series of positive economic reports for Ireland. The first country to exit a bailout program since the Euro’s own debt crisis erupted in 2009.