(wraps statements on Greece and Ireland)
* S&P cuts Irish outlook to negative, Greece on credit watch
* Spreads widen after the announcement amid financing fears
* S&P says decision on Greece likely this month
By Daniel Flynn and Carmel Crimmins
ATHENS/DUBLIN, Jan 9 (Reuters) - Standard & Poor's warned Greece and Ireland on Friday it could cut their sovereign debt ratings as the global slowdown brought an abrupt end to years of solid growth and placed public finances under increasing strain.
Spreads in Greek and Irish 10-year bonds widened against benchmark German debt after the ratings agency warned that burgeoning fiscal deficits and falling productivity left the two euro zone countries badly placed to cope with the global crash.
S&P said Greece's conservative government had done little to tackle hefty current account and fiscal gaps despite a decade-long boom, and now faced a painful adjustment as a slowdown hit its 260-billion-euro economy.
Analyst Marko Mrsnik said a decision would probably be taken this month on whether to change Greece's A/A-1 long- and short-term foreign and local currency sovereign credit ratings. (Click on for full statement).
S&P also revised its outlook to negative from stable for Ireland -- whose 'Celtic Tiger' economy is reeling from the global credit crunch and a domestic property crash -- leaving the door open for a future cut to its AAA rating.
"The negative outlook reflects our view of the likelihood of a downgrade if ongoing fiscal measures to recapitalise the banks and boost the economy fail to improve competitiveness, diversity and growth prospects," S&P's analyst Trevor Cullinan said.
Coming amid a slew of data pointing to a worse-than-expected euro zone recession, some analysts said the move would heighten expectations for a large rate cut by the European Central Bank.
The yield premium offered by 10-year Irish government debt over benchmark euro zone paper briefly widened by five basis points to a new high of 64 bps, while Greek bonds blew out by as much as 10 basis points to 230 basis points.
"There has been selling, particularly on the Greek side. Ireland is on a negative outlook, so it's got a bit of time ... while Greece is on 'watch' so it could be any week now before they actually get a downgrade," said David Keeble, global head of interest rate strategy at Calyon in London.
BADLY PLACED TO COPE
Both Greece and Ireland have seen labour costs rise and productivity tumble after years of economic boom, leaving them poorly positioned to weather the global crash.
The collapse in Ireland's property market slashed tax revenues and helped plunge its economy into recession, forcing the government to bail out the three largest banks and borrow heavily. Economists forecast its budget deficit could top 16 billion euros this year -- or around 8 percent of GDP.
Ireland has already raised taxes and Finance Minister Brian Lenihan is holding talks with unions and business leaders to try to squeeze public spending. His department noted S&P's decision and said it would take further action to stabilise finances.
In Greece, the worst riots in decades erupted in December, prompted by the police shooting of a teenager and anger at economic policy, driving debt spreads to record levels.
Mrsnik said Greece, which already has the joint lowest ratings in the euro zone, would miss its 2.7 percent growth forecast next year and would fail to cut its budget deficit below the EU 3 percent of gross domestic product (GDP) ceiling.
The government's 2009 budget targets a deficit of 2.0 percent of GDP, but S&P is forecasting 3.5 percent. A Finance Ministry spokesperson was not immediately available for comment.
With a wave of government bond issues to swamp international markets this year, both Ireland and Greece could find themselves paying sharply higher prices if their ratings fall. Greece alone has said it hopes to place 42 billion euros of bonds in 2009.
"Things aren't going to get better short term but I think mid single A is about right for Greece, a downgrade to sub single A is overdoing it," said Padhraic Garvey, head of relative value strategy, ING, Amsterdam.
"If we return to systemic problems then I can see peripheral issuers beginning to struggle but if we have more of the same ... I think spreads are wide enough," he said. (Additional reporting by George Matlock, Ian Chua, Kylie MacLellan in London and Renee Maltezou in Athens; Editing by Andy Bruce)