Standard & Poor’s cut Ireland’s sovereign debt rating by a notch to double-A-minus, citing the massive cost of patching up the hemorrhaging Irish banking system.

The news comes at a time when worries about Ireland’s finances have loomed larger in financial markets. The cost of insuring against a default on Irish government debt has risen 25% over the past month, approaching levels seen in early 2009, and Irish bonds are trading at a record premium to safer German bonds.

S&P said it now expects recapitalizing the financial system in Ireland to cost the government half again as much as it had earlier estimated. The tab could run to 45 billion to 50 billion euros ($57 billion-$63 billion), the ratings firm said.

The huge cost of bailing out the banks will push Irish government debt up well above the country’s annual gross domestic product, S&P said – well above the levels seen in other stressed sovereign debt issuers such as Belgium and Spain.

“The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government’s fiscal flexibility over the medium term,” S&P said.

It estimated that the total costs of support for the financial sector will hit 58% of annual GDP. Moody’s made some mind-bending cost estimates of its own last month in downgrading Ireland for the second time this year.

The Irish banks collapsed in 2008 when a massive property bubble popped. Taxpayers have been consigned to spending huge sums to prop up the banks, including Anglo Irish, which ran aground after making bad loans. Former CEO Sean Fitzpatrick took $114 million in personal loans over eight years at the bank, but recently declared bankruptcy. The government has been investigating.

But with the economy still faltering, support for Anglo Irish has become a thorn in the side of Ireland’s finance minister Brian Lenihan. He recently said the government propped the bank up “to ensure that the resolution of debts does not damage Ireland’s international credit-worthiness and end up costing us even more than we must now pay.”

With investors showing a renewed aversion to risk, Ireland now faces the unhappy prospect that it will end up paying more anyway.