Irish government's coalition partner demands election

Ireland's Greens pull the plug on their deeply unpopular coalition government partner by calling for an election in January.

DUBLIN // Ireland's Greens pulled the plug on the deeply unpopular coalition government on Monday by calling for a national election in January after an EU/IMF bailout package is in place.

The Greens, junior partner in the coalition, withdrew their support a day after the European Union and International Monetary Fund agreed to rescue Ireland with loans to tackle its banking and budget crisis, which have stirred up deep public anger.

European and IMF officials began thrashing out details of the package -- expected to total 80 to 90 billion euros -- on Monday, while the government put finishing touches to a drastic 15 billion euros ($20.5 billion) austerity plan.

A top euro zone official said the first loans could flow in January but European shares and the euro reversed early gains made in response to an outline rescue deal to shore up Ireland's shattered banks and stop contagion spreading to other vulnerable members of the euro zone.

Ireland's coalition government of Fianna Fail, the Greens and independent politicians has a three-seat majority in parliament, which will be more than wiped out if the six Green lawmakers withdraw their support.

"We have now reached a point where the Irish people need political certainty to take them beyond the coming two months. So, we believe it is time to fix a date for a general election in the second half of January," the Greens said in a statement.

The main opposition party said on Sunday it would consider a vote of no-confidence in the government, possibly before a December 7 budget which will mean years of austerity.

Economists doubted whether the second euro zone rescue in six months, after Greece, would stop markets targeting fellow straggler Portugal, or prevent heavily indebted European states defaulting in the longer run.

But euro zone policymakers expressed optimism.

"We guess that the first money shipment could be realised in the course of January," chairman of euro zone finance ministers Jean-Claude Juncker told reporters.

"I don't think any immediate contagion effect could be the case," he said. "The fact that we settled the Irish case indicates that we are taking financial stability and cohesion of the euro area very seriously."

Moody's Investors Service said a "multi-notch" downgrade of Ireland's credit rating, still leaving it in the investment grade category, was now the most likely outcome.

While the international rescue package is expected to be less than the 110 billion euros provided for Greece in May, it will be larger as a proportion of national wealth and in per capita terms.

Prime Minister Brian Cowen said the government's four-year economic plan, to be announced on Wednesday, would involve 10 billion euros in public spending cuts and 5 billion euros in tax rises, on top of two years of harsh austerity and recession already endured.

The government -- whose popularity has plummeted over its handling of the crisis -- is expected to cut the minimum wage, slash social welfare spending, reduce the number of public employees and add a new property tax and higher income taxes.

Finance Minister Brian Lenihan said the EU and IMF had seen the outline of Ireland's plan and would not demand significant changes. "I think it is unlikely that they will request changes in the plan," Lenihan told state broadcaster RTE.

In an effort to rekindle economic growth, ministers said they would preserve the ultra-low 12.5 per cent corporate tax rate which is a magnet for foreign investment but an irritant to many EU partners which see it as a form of unfair competition.

Portugal, next in capital markets' crosshairs, rushed out a statement saying Sunday's agreement by EU finance ministers to grant Ireland assistance should restore investors' confidence in the 16-nation single currency area.

Economists said the Irish bailout might bring short-term relief but voiced doubts about whether it would prevent Portugal being forced to seek assistance eventually.

"I think it means Portugal is next (to request help). I don't know if it will happen before the end of the year or after, but it's almost inevitable now," said Filipe Garcia at Informacao de Mercados Financeiros in Porto.

But German Finance Minister Wolfgang Schaeuble played down the risk of market problems spreading to other high-deficit countries. "If we now find the right answer to the Irish problem, then the chances are great that there will be no contagion effects," he told ZDF television.

Before the call for an early election, the cost of insuring Irish debt against default fell to 484 basis points from 507 at Friday's New York close, according to CMA data. This reflects a 33.8 per cent implied probability of a default within five years compared with 35.2 per cent on Friday.

A plan to restructure Ireland's banks, which had to be rescued by the state after a property boom fuelled by reckless lending collapsed, will be a central plank of the broader international aid package.

Lenihan said Ireland's banks would be shrunk to focus on domestic business and consumer lending under the EU-IMF scheme, which could enable Dublin to return to bond markets quickly.

Britain, which is not part of the euro zone, said it would offer Dublin bilateral assistance on top of its share in EU and IMF aid. Finance minister George Osborne said London's contribution could be about 7 billion pounds ($11.19 billion).

British and German banks are the biggest creditors of Ireland's stricken banks, according to official data.

Non-euro Sweden said it would offer up to 1.5 billion euros.