Ireland's credit rating was lowered two notches by Standard & Poor's, as the country prepares to offer a four-year budget aimed at slashing the deficit.

"The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland's troubled banking system," S&P said, according to Bloomberg News.

S&P cut the country's long-term rating to A from AA- and the short-term rating to A-1 from A-1+. The outlook on the rating is negative.

The downgrade could add to Ireland's problems in the bond market. Investors are reluctant to hold Irish bonds because of the country's budget problems and the instability in its banking sector.

The EU and IMF are working on a rescue package for Ireland worth about 85 billion euros ($113.6 billion), Bloomberg News said. About 35 billion euros of this would go to the banks.

Meanwhile, the country is working on a budget that aims to reduce the deficit to 3% of GDP by the end of 2014, from about 32% this year, including the cost of the banking rescue.

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