Ireland on the brink of government collapse

Vandals attack a government office north-west of Dublin yesterday in a show of anger that has spread to within the ruling Fianna Fail party ranks.

DUBLIN // Ireland's embattled government is clinging to office in a bid to push through a crucial budget at the centre of a multi million euro international rescue deal for its economy.

Political turmoil in Dublin is causing consternation in Europe, which requires the Irish parliament to endorse its annual budget, as well as a four-year austerity plan due to be published today to pave the way for an emergency EU and IMF bailout package.

The threat of an imminent collapse of the beleaguered government is fuelling fears that the euro zone's second bailout in nine months will not halt Ireland's sovereign debt crisis extending to other countries.

Expert teams from the EU and the IMF have been in Dublin since last week, examining Ireland's finances in a bid to conclude an estimated €90 billion (Dh442bn) rescue plan.

The three-year package aims to help Ireland reduce its enormous deficit, which stems from its controversial decision to spend some €45bn rescuing five banks that faced collapse when the country's property bubble burst in 2008, plunging it into recession.

But the government's reluctant move last weekend to seek EU-IMF aid set in train a series of calamitous political developments that have brought the fragile coalition government to the brink of collapse and raised fears that the crucial 2011 budget due on December 7 could be derailed.

The prime minister, Brian Cowen, was forced on Monday to announce plans for an early general election in the new year after threats from junior coalition partner, the Green Party, to pull out of government.

The deeply unpopular leader insisted that it was in the national interest for him to remain at the helm while the necessary budgetary steps were taken to secure the EU-IMF bailout.

But speculation was last night intensifying that the government may not even make it to the new year, with a razor-thin majority to pass the worst budget in the state's history, which will usher in €6bn in cuts and taxes.

Mr Cowen is under intense pressure to step down from within and outside his ruling Fianna Fáil party, with two independent MPs and the opposition demanding a snap poll before the budget.

Mutinous Fianna Fáil backbenchers were considering a no-confidence motion ahead of a parliamentary party meeting last night that one rebel MP warned would be a "bare-knuckle" fight over Mr Cowen's handling of the financial crisis, which has left the reputation of the largest party in the country in tatters.

Yesterday, one of the country's smaller political parties, leftist Sinn Fein, submitted a motion of no confidence in Mr Cowen, although it is unlikely to be debated or put to a vote because the party lacks the required 12 signatures.

Richard Bruton from the largest opposition party, Fine Gael, said yesterday that only a newly elected administration with a fresh mandate should be involved in developing a future budgetary strategy.

European Monetary Affairs Commissioner Olli Rehn yesterday appealed to opposition parties to get behind Fianna Fáil and approve the upcoming budget.

"Stability is important," Mr Rehn told reporters after meeting Irish members of the European Parliament in Strasbourg, France.

"We don't have a position on the domestic democratic politics of Ireland but it is essential that the budget will be adopted in time and we will be able to conclude the negotiations on the EU-IMF programme in time."

A delay in adopting the budget would almost certainly prevent the release of the first bailout loans under IMF rules.

However, Jim Power, the chief economist at Friends First, a Dublin financial services firm, said the EU-IMF negotiators would take a pragmatic approach to Ireland's political woes and adapt their timetable accordingly.

"The negotiators would have to recognise that if the government falls, then getting a budget in December will be impossible. If the reality is that it will be pushed to January, they will wait until a new government is formed and a new budget is introduced."

Today's scheduled publication of Ireland's four-year austerity plan is the first key step in the formal process to conclude the international rescue deal, which will entail a radical downsizing and restructuring of the crippled banking sector and a host of economic reforms.

The austerity plan, which has the support of the EU-IMF team, aims to save €15bn in a bid to slash Ireland's massive deficit from 32 per cent of gross domestic product to the EU limit of 3 per cent by 2014.

The 150-page savings plan will contain significant reforms to the tax system, with new levies on property and water likely, as well as cuts to social welfare.

The IMF said in a paper released on Monday that Ireland should gradually lower unemployment benefits and cut its minimum wage to boost employment.

Ireland reluctantly announced last weekend that it would seek a lifeline from the EU-IMF to recapitalise its debt-stricken banks and cover its borrowing requirements over the next three years, so it does not have to depend on the volatile international markets.

Some €8bn has also been offered by non-euro zone nations Britain and Sweden.

The intervention by the EU, the European Central Bank and the IMF was triggered by a run on bank deposits in the past six months due to fears about the debt crisis.

Ireland's central bank governor, Patrick Honohan, told a meeting of accountants in Dublin yesterday that all the country's banks were up for sale, adding he expected the EU and the IMF to attach many conditions to a financial rescue.

Public fury with the government's handling of the crisis has led to only minor protests outside the Dublin parliament in the past few days.

The constituency office of a senior Fianna Fail minister was vandalised on Monday night, with the word "traitors" daubed on the front of the premises.