November 23, 2010

Irish Government Collapses Under Weight of Debt

Early elections to be held after budget passage

Brian Cowen, Ireland's prime minister, said that he will dissolve his government once the austerity budget necessary for a bailout is passed in December. The New York Times reported that Cowen’s announcement followed a day of turmoil in the debt-ridden nation. Loss of support within his governing coalition has led to speculation that the budget may not make it through Parliament and the rescue may not happen, according to a Reuters report.

AdvisorOne reported that Ireland had accepted the offer of a bailout package from the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) on Sunday evening. Monday, however, saw public outcry and demonstrations against the prospect of even harsher austerity measures, as well as loss of support from some in Cowen’s own party, Fianna Fail, and the Green Party, a member of the ruling coalition. Reuters reported that these, coupled with the drop in Ireland’s credit rating by Moody’s, have led to Cowen’s announcement that elections will be held early in 2011.

On Tuesday, Sinn Fein, an opposition party, tabled a motion calling for a vote of no confidence in Cowen after he failed to allow elections immediately, choosing instead to postpone them till after the vote on the budget. Cowen, for his part, seemed to challenge opposition parties Fine Gael and Labour to block the budget and thereby hold up the rescue package and the election.

The budget is to be presented on Wednesday, with the Dáil Éireann, the Irish parliament, set to vote on the measure on Dec. 7. While some in the government have said they will not support it, John Gormley, leader of the Green Party, has said in a statement in the Irish Times that he will not challenge the budget despite its harsh measures. It is expected to cut the minimum wage and social welfare spending, including a child benefit; slice the number of public employees; implement a new property tax and raise income taxes.

In addition, Patrick Honohan, Ireland's central bank governor, has said that all the countries' banks “are for sale as far as I am concerned.” He told a meeting of accountants, “I've been an advocate for a number of years for small countries to have foreign owners for their banks.” He also said that he expected a lot of conditions to be attached to the rescue by the EU and the IMF.

Failure to pass the budget could prevent the release of the first bailout loans, and Cowen said he would push for passage for the country’s sake. In a statement reported in the Irish Times, he said, “There are occasions when the imperative of serving the national interest transcends other concerns, including party political and personal concerns. This is one such occasion.”

Olli Rehn, chief of EU monetary affairs, said on Tuesday in a Reuters report that Ireland must pass the budget on time so that the rescue could proceed. "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 program in time."

European and Irish markets both fell on concerns that the bailout might fail or that the problems might spread to other EU countries. Even though it was announced that Greece would most likely receive the third tranche in its loans, after a nod from IMF mission chief Poul Thomsen, worries that Portugal would be next continued to worry investors. On Tuesday morning U.S. futures were down on concerns about the financial crisis in Europe as well as concerns about strife in Korea.

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