CREDIT rating agency Moody's Investors Service has downgraded part-nationalised Royal Bank of Scotland by one notch to Baa1 from A3 because its latest proposed restructuring poses a risk to bondholders.

The move is a blow to new RBS chief executive Ross McEwan who is seeking to turn around the fortunes of the bank, which was the subject of a £45 billion Government rescue in 2008.

He wants to cut £1bn from its cost base, speed up the wind-down of the 81% state-owned bank's riskiest assets and sell its US arm Citizens.

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"Over a longer-term horizon, RBS's restructuring plan should be beneficial for creditors if executed according to plan," said Andrea Usai, Moody's vice president.

"However, the plan is large and complex, carrying significant execution risk in the short to medium term, happening at a time when the bank has limited financial flexibility to manage unforeseen events, which could arise either from the plan or from other sources, such as further litigation or conduct costs."

The change to the rating leaves RBS three notches above junk status.

The agency rated RBS as Aa1, just below its top AAA rating, until January 2009.

The ratings agency remains concerned that RBS could be hit by conduct and litigation costs.

The bank faces ongoing regulatory reviews on issues including the manipulation of the foreign exchange markets.

It is also worried that the bank's plans could be hit by political interference.