Standard and Poor's has raised its outlook on Ireland's sovereign rating, saying the Government may exceed its targets for debt reduction as the economy recovers.

The move comes six months ahead of the country’s planned exit from its EU/IMF bailout, which will require a full return to borrowing on bond markets.

It will also be a boost to sentiment after data last month showed Ireland had unexpectedly tipped into recession for the first time in four years.

The ratings agency lifted the outlook on the nation’s BBB+ grade to positive from stable, saying there is a one-in-three chance the rating will be raised in the next two years.

“Ireland could over-achieve its fiscal targets and reduce its government debt faster than we currently expect,” S&P said.

The company added that Ireland’s economic recovery is underway.

“Ireland’s general government debt burden is likely to decline more rapidly, as a percentage of GDP, than we had previously expected,” S&P said in a statement today.

The Government is pressing on with budget savings after needing a bailout in 2010 and is also working on a plan to recoup some of the money it ploughed into failing lenders from the euro area’s backstop fund

S&P said Ireland’s government debt will peak at 122 per cent of gross domestic product this year and decline to 112 per cent by 2016.

The report also cited the “strong consensus” among the country’s largest political parties to maintain policies to cut the debt and boost the economy’s competitiveness. Housing prices should bottom out in 2013.

The report warned that Ireland’s private-sector’s access to external funding remains “fragile,” and that it’s banking sector has a high and rising levels of non-performing loans.

Moody’s is now only major rating agency that rates Irish sovereign debt as non- investment or junk grade. Earlier this year, Moody’s affirmed its negative outlook on Ireland’s sovereign rating, as the EU bailout of Cyprus and poor asset quality in the Irish banking system causes concern.

Standard & Poor’s had Ireland on negative outlook until February, when the government struck a long-awaited deal with the European Central Bank allowing it to convert promissory notes into long-term bonds. The deal effectively gave the government far longer to repay debts it ran up in rescuing the Irish banking system.