January 20, 2011

Ireland Roiled by Cabinet Resignations; Doubts on Funding Spain’s Banks

Mass resignations daunt Irish; Spanish fundraising in doubt

A surprise move on Thursday by Ireland’s Prime Minister Brian Cowen blew up in his face as an intended reshuffle of his Cabinet resulted instead in fury from coalition partners and others. Meanwhile, Spain, seeking to soothe its own financial troubles, planned to recapitalize its banks—but since five of them failed European Union (EU) health checks last year, how much money Madrid can raise is in doubt.

Reuters reported that mass resignations from the Irish Cabinet began Tuesday; Micheal Martin, foreign affairs minister, was the first to step down after losing a challenge to Cowen in a confidence vote. He was followed by Mary Harney, health minister, on Wednesday, and her resignation apparently spurred Justice Minister Dermot Ahern, Transport Minister Noel Dempsey and Defense Minister Tony Kileen, none of whom had planned to seek reelection, to surrender their offices as well.

Cowen, unpopular even before the International Monetary Fund (IMF) stepped in to bail out Ireland, had planned to use the vacancies as an opportunity to replace ministers prior to calling elections. However, rage from voters, who had planned to punish Cowen and his party at the polls, and resistance from opposition parties made a hash of the strategy.

Gerard Williams, a 43-year-old postal service worker, was quoted as saying, “They should all be gone. There should be an immediate general election. Everyone is sick of it. Fianna Fail need to be punished and the Greens need to be punished for supporting Fianna Fail.”

Spain, struggling to avoid the fate of Ireland in bailout territory, is working to cut down a public deficit that is one of the euro zone's largest. To that end, it has been implementing severe spending cuts. Economists, however, worry that a shortfall of capital on the part of its savings banks and the rough shape of regional government finances could jeopardize its efforts.

While the economy ministry says that the regions have met their 2010 targets, Catalonia, according to the Spanish daily El Pais, failed to do so last year and now plans to slash spending by 10% to achieve its 2011 objectives. Its failure to meet its goal resulted in its being cut off from borrowing.

Despite all that, Spain’s risk premium fell 8% against German debt to 219 basis points; that is its lowest level since early December. Traders chalked it up to technical factors instead of news.

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