Standard & Poor’s cut its rating on Ireland to A-minus from A Wednesday, citing a weakening economic recovery that stands to further increase the already unbearable cost of propping up the nation’s reckless, overextended financial institutions.

S&P said it cut Ireland’s rating after raising its estimate of the costs of a cleanup of the banking sector in a severe downturn. S&P now tabs as “problematic” assets comprising 25% to 40% of the banking system – up from its previous, already harrowing estimate of 15%-30%.

“We consider the decline in creditworthiness of the Irish banking system over the past three years, and the related collapse in investor confidence, to be one of the most severe that we have observed in a major developed economy for many years,” S&P said.

Ireland’s banks now rate a 6 on the rating agency’s banking industry country risk assessment scale, with a rating of 1 denoting the strongest banking sector and 10 the weakest. The downgrade puts Ireland in some exclusive territory, in league with economic powerhouses such as Turkey, Estonia and Cyprus.

There are certainly signs that the banking storm in Ireland is still gathering. Some observers have said they expect 2011 to be the year of the bank run in Europe, as depositors flee Ireland first and then, possibly, other teetering banking systems such as the one in Spain.

As their deposit bases shrink, the Irish banks become more and more dependent on funding from the government and from the European Central Bank. But those spigots won’t remain open forever, S&P notes. That likely means more trouble for the banks that got downgraded Wednesday, including Bank of Ireland, the fraud-ridden Anglo Irish and Allied Irish (AIB), whose latest plunge is portrayed at right.

In our opinion, both the ability and willingness of the Irish government to provide extraordinary support to the four rated domestically owned Irish banks has weakened and we observe that these banks remain highly reliant on central bank funding sources and have been unable to source term funding, even when government-guaranteed, for some months.

The developments come as the Irish brace for coming elections, in which the cost of bailing out the banks is a major issue. It is surely only a matter of time till somebody is elected who will haircut the banks’ bondholders in the name of holding down what is already an outrageous bailout tab.

The question is whether that somebody will be elected in this go-round, or whether Ireland will have to suffer further strife and economic collapse to make inflicting pain on the bondholders a top priority.