With bailout near, Irish PM's coalition cracks

By Anthony Faiola

Washington Post Foreign Service

Monday, November 22, 2010; 8:46 AM



DUBLIN - One day after Irish Prime Minister Brian Cowen requested a financial bailout for his country from the International Monetary Fund and European Union, he faced a deepening political crisis as the junior partner in his ruling coalition called for a new general election in January.

Monday's move by the Green Party deepens the political turmoil that is unfolding in Ireland at the same time as Cowen's government is seeking a rescue package to prop up the country's banks and plug a massive hole in public finances.

Importantly, however, the Green Party said it would not withdraw its support immediately, but would remain a part of the governing coalition long enough to pass a new austerity budget that will dramatically slash government spending.

Passing the budget on Dec. 7 is considered vital to sealing the deal for an international rescue that could top $110 billion. The governing coalition led by Cowen's Fianna Fail party holds a majority in parliament of only three seats, making support by the six Green Party lawmakers essential.

"We have always said that our involvement in government would only continue as long as it was for the benefit of the Irish people," Green Party leader John Gormley told reporters in Dublin." Leaving the country without a government while these matters are unresolved would be very damaging and would breach our duty of care."

The Green Party's decision to leave the government at year's end virtually guarantees that Cowen, who was set to stay in office until 2012, will have no choice but to cut short his term and call new elections in January. It also will likely mean a fall from power for the Fianna Fail party, which has dominated Irish politics since the nation won independence from Britain in the first half of the 20th Century.

Opinion polls show the left-of-center Labor Party and center-right Fine Gael Party both leading Fianna Fail, whose public support has now eroded to 17 percent in some polls.

The International Monetary Fund and the European Union agreed Sunday to support the emergency bailout for Ireland after Cowen's near-bankrupt government--which for days had denied it needed help--abruptly requested a lifeline.

Ireland will become the second European nation in six months to require a multibillion-dollar rescue. The promise of aid comes as major nations in the region have been pressuring Ireland to accept a bailout, fearing its woes could spread to other troubled nations in the region, including Portugal and Spain, and potentially destabilize the euro.

But the currency advanced for a fourth day against the dollar and the yen on optimism that the rescue will prevent a spread across the region's debt markets.

On Monday, European markets declined for a second consecutive day, led by falling Irish bank stocks, and U.S. futures also sank lower as investors digested news of the bailout and tried to figure out what would happen next.

After a hastily arranged conference call from Dublin Sunday, in which Irish officials asked for help amid fears of a run on the banks, E.U. financial leaders and the IMF agreed in principle to come to Ireland's aid. But the key details of the package - including its size and the conditions attached to it - could take days or weeks to hash out between Irish officials and a team of negotiators from the IMF and the E.U.

As part of the deal, European officials said - and Cowen conceded - the government would need to impose a major restructuring on its failing financial system as well as further austerity on the already hard-hit Irish public.

"Irish banks will become significantly smaller than they have been in the past and gradually learn to stand on their own two feet once again," Cowen said. And "the government has to increase our taxes and reduce our spending to levels we can afford."

Ireland's troubles underscore how the reverberations of the global financial crisis are still festering worldwide two years after the collapse of Lehman Brothers in the United States. Although Greece, which received a $141 billion bailout in May, buckled under the weight of government overspending, mismanagement and corruption, Ireland's emergency stems from deeply troubled banks that are riddled with bad loans from a U.S.-style real estate bust.

The still-unknown extent of those losses is zapping confidence from investors and depositors, leaving Irish banks unable to borrow on global markets even as they have lost billions in deposits. At the same time, the government, which has already plowed $68 billion into the banks, is facing a huge budget gap from collapsed tax revenues and can no longer afford to prop up the banks itself.

Panicked investors have dumped Irish bonds in recent weeks, driving up the cost of borrowing for Ireland and a number of other European nations.

"The banks were too big a problem for the country," Finance Minister Brian Lenihan said Sunday on Irish radio. "The key issue all the time for the government is to ensure that we do not have a collapse of the banking sector."

After already forcing deep austerity on its citizens to help close the gap - cutting state salaries and slashing benefits to even widows and the blind - the Irish are facing the prospect of even more pain. The E.U. and the IMF will need to approve what is set to be a four-year plan to cut spending by $20 billion.

Newspapers in Dublin are bemoaning the national embarrassment of a country that in recent years became known as the "Celtic Tiger" but now is going hat in hand to Europe and the IMF. Dublin's Sunday Independent labeled the past seven days "the blackest week since the [Irish] Civil War," with many here lamenting a steady stream of young Irish who are emigrating from the country in numbers not seen in years. Small bands of protesters opposed to the bailout scuffled with police in Dublin late Sunday.

Although analysts have said Ireland might need $50 billion to $130 billion to recapitalize its banks and shore up the government's finances, Lenihan and Cowen declined to say how much the government would seek. Lenihan said the number will come in below 100 billion euros, or $137 billion.

But some E.U. officials suggested Sunday that the figure could rise as high as $120 billion. With Ireland unlikely win back the confidence of investors quickly, E.U. officials were preparing to offer Dublin a package of loans it could draw on for up to three years.

Ireland's request for aid will continue to test unity in the European Union, which will foot the bill for the bulk of the bailout from a $1 trillion rescue fund set up to aid financially ailing members after the bailout of Greece this spring. But the public in Germany, for instance, was enraged by the E.U. bailout of Greece, in which Germans made the single largest contribution. Chancellor Angela Merkel will now need to sell another unpopular bailout, arguing that aid for Ireland is essential to preventing a broader crisis that could destabilize the euro.

German Finance Minister Wolfgang Schaeuble told the Deutsche Welle German news agency on Sunday that the terms of the deal would be "tough." Nevertheless, he said it would need to be big enough to ensure that "it's not just a shot in the arm, but that it will also help to solve the problem."

British Prime Minister David Cameron has said London might take the extraordinary step of offering direct loans - reportedly up to $11.2 billion - to Ireland as part of an aid package, something that may not sit well with some in his Conservative Party.

Yet it remained unclear whether shoring up Ireland would be enough to avoid the need to bail out Portugal, another small nation whose weak economy and huge budget deficit have spooked investors. A greater test will be whether ailing Spain, the fourth-largest economy in the 16-nation euro zone, also needs help.

In for the roughest ride, however, is the Irish government itself.

Cowen is struggling to calm a furious opposition, as well as members of his own party and the Irish public, who are accusing him of mismanaging the crisis and misleading the nation about the need for an international bailout. He spent Sunday once again rejecting calls to resign.

All of last week, even as IMF negotiators were arriving in Dublin, Cowen continued to insist that Ireland could handle its problems. Later, he seemed to suggest that it was entering talks only to ensure stability of the euro. Privately, Irish officials have said he was staking out a negotiating position with the E.U. and the IMF.

"The political situation is very tense, and it could make it more complicated to resolve the crisis," said Constantin Gurdgiev, an economic lecturer at Trinity College Dublin. "Ireland's problems are not going to be solved just with a check from the IMF and the E.U."

© 2010 The Washington Post Company