Good news: Ireland isn’t Greece.

Bad news: Ireland isn’t Spain, either.

At least that’s what Standard & Poor’s concluded on August 25 when it cut the credit rating on Ireland’s sovereign debt one step to AA-.

S&P is worried that the cost of re-capitalizing Ireland’s banks is going to be higher than estimated. The company raised its estimate to $63 billion. That’s a more than 42% increase from S&P’s former estimate.

On the downgrade the spread on Ireland’s sovereign debt rose to a record 3.32 percentage points above the yield on the benchmark German 10-year bonds. In comparison the spread on Greek sovereign debt stood at 8.83 percentage points and the spread on Spanish debt stood at 1.83 percentage points.

Ireland had the largest budget deficit in the Euro Zone in 2009 at 14.3% of GDP. That’s projected to fall to 11.7% in 2010. Standard & Poor’s projects that Ireland’s net government debt will hit 113% of GDP in 2012.

Despite those high figures, Ireland gets a credit rating seven steps above Greece’s junk bond rating because the country’s economy is much closer than the Greek economy to returning to global competitiveness after the government imposed a draconian program of spending and wage cuts. And the Irish political environment looks like it will give the government more room to turn the country around in comparison to Greece.

On the other hand, the credit markets are drawing a big contrast between the lax pre-crisis regulation of the banking system in Ireland and the relatively solid regulation of Spanish banks. Spanish regulators had required banks there to increase their reserves as housing prices soared and that has limited the damage to the Spanish financial system.

The downgrade doesn’t come at a good time for Ireland or for the euro.

The country sold 400 million Euros to 600 million Euros in short-term debt on August 26.

And this is the third bit of bad news for the euro in the last week or so. First, Hungary has dug in its heels about making the budget cuts it promised in exchange for a European Union bailout. Second, Axel Weber, head of Germany’s Bundesbank, said that the European Central Bank will have to keep its emergency lending programs in effect longer than expected–until the first quarter of 2011. And now, third, Ireland’s downgrade reminds investors that while growth in the center of the Euro Zone (Germany and France) has been robust, the economies of the periphery remain troubled.