Irish govt faces election backlash after fiscal pain
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Irish govt faces election backlash after fiscal pain

Ireland's government will face the first real backlash from a vicious set of austerity measures when voters head to the polls in the northwestern county of Donegal today.

world Updated: Nov 25, 2010 10:28 IST

Ireland's government will face the first real backlash from a vicious set of austerity measures when voters head to the polls in the northwestern county of Donegal on Thursday.

Prime Minister Brian Cowen's four-year plan for tackling the worst budget deficit in Europe has failed to impress investors or calm fears that Ireland's woes will tip other euro zone nations into crisis.

The 15 billion euros ($20 billion) in spending cuts and tax increases unveiled on Wednesday will form the basis for an IMF/EU rescue package worth about 85 billion euros.

But the measures, including cuts to the minimum wage and thousands of job losses, are likely to seal defeat for Cowen's Fianna Fail party in the poll for a vacant parliamentary seat in Donegal and result in Cowen's majority shrinking to just two.

Ruling Fianna Fail held the seat in Donegal South West but is expected to lose it to smaller Sinn Fein in the by-election.

With Cowen's coalition imploding amid public disgust at having to go cap in hand to the IMF and the EU, the Donegal vote raises the risk that the 2011 budget, the first step in the four-year plan, may not make it through parliament on Dec 7.

Failure to get next year's budget passed would turbo-charge the crisis in Ireland and Europe and analysts have said the main opposition parties may abstain from voting to allow the budget through if it looks like Cowen cannot get the numbers.

Centre-right Fine Gael and left-wing Labour have not said they will abstain and their refusal to countenance a national consensus on the budget has pitted Ireland's fiscal path with uncertainty.

Cowen's government is not expected to last beyond the first quarter of 2011 and Fine Gael and Labour are likely to form a coalition government with new ideas about how the budget can be brought under control by a deadline of 2014.

Even excluding the political uncertainty surrounding the 2011 plan, investors are sceptical the fiscal targets can be achieved with rating agency Standard & Poor's dismissing the growth assumptions underlining the strategy as too optimistic.

Portugal, Spain
Euro zone policymakers are hoping that Spain and Portugal can stave off an Irish- or Greek-style debt meltdown.

A Reuters poll this week showed that 34 out of 50 analysts surveyed believe Portugal will be forced to follow Ireland and ask for help. In a separate survey only four out of 50 economists thought Spain would seek external aid.

Unlike Ireland and Portugal, Spain has its 2011 budget in the bag and its debt as a%age of gross domestic product is estimated at 60% this year compared with Ireland's 100% and Greece's 145%.

But German proposals for private investors to take a hit in future euro zone debt crises have markets spooked, ramping up borrowing costs for Madrid.

Highlighting the fault-lines across Europe, Spain's Economy Minister urged Germany on
Wednesday to stop pushing its idea of a permanent euro crisis mechanism.

In Dublin, officials from the IMF and the EU will continue talks on a package of loans to cover Irish sovereign funding costs and an injection of fresh capital into its banks that will see Dublin left with effective control of the top three banks.

Billions of euros could be used immediately to recapitalise the banks but most will be kept as a backstop in case they need more in future and to ease funding strains.

Bailout package negotiations may be finalised over the weekend, sources said.

First Published: Nov 25, 2010 10:25 IST