Political chaos engulfs Ireland, threatens bailout

Political infighting engulfed Ireland on Tuesday, threatening to trigger a quick election and delay a massive EU-IMF bailout. Rebels from Prime Minister Brian Cowen's own party pressed to oust him and opposition leaders demanded an election before Christmas.

Despite the discontent, Cowen's Cabinet colleagues in the Fianna Fail party said they were confident the rebels have too few votes to pursue a no-confidence motion against Cowen.

At stake is the future course of the potentially €100 billion ($135 billion) European Union and International Monetary Fund rescue of Ireland, a nation heading toward bankruptcy next year because the government cannot pay an ever-escalating bill to save its state-backed banks.

Ireland's deficit this year is 32 percent of GDP, the highest in Europe since World War II. Its banks are running short of cash because they can't borrow on open markets. Analysts increasingly warn that Ireland's bank-bailout bill could ultimately reach €90 billion ($125 billion) — double the government's current forecast — because of defaults looming down the road, particularly in residential mortgages.

The Irish political and economic crisis, and its uncertain solution, drove up borrowing costs Tuesday for Portugal, Spain, Greece and Italy, all of whom face their own mounting debt-financing struggles. The rising interest rates on eurozone bonds reflect fears that a third member of the 16-nation eurozone — after Greece and Ireland — might be backed into its own bailout corner soon.

The Irish Cabinet gathered at Cowen's office to complete a four-year plan for unprecedented budget cuts — a condition of Ireland's international bailout. The plan, which proposes to slash €15 billion ($20 billion) from the country's 2011-14 budget deficits through a combination of cuts and tax hikes, is to be published Wednesday. The 2011 budget will follow Dec. 7.

Transport Minister Noel Dempsey said the EU-IMF rescue aid couldn't flow until Ireland began slashing €6 billion ($8.2 billion) from its 2011 deficit.

"We don't have the luxury of time in relation to this," Dempsey said. "We asked for assistance. We were given that assistance on the basis that we were going to produce this four-year plan, that we were going to produce a budget, and that budget would pass. If we can't do that, then the assistance isn't there."

Two separate Fianna Fail meetings were scheduled for Tuesday — one led by party rebels, the second by the party's full 70-strong bloc in Dail Eireann, Ireland's parliament.

"There's serious discontent within the parliamentary party. I believe it's now up to those who've spoken out to take soundings amongst their colleagues to take action to remove that man (Cowen) immediately," Fianna Fail lawmaker John McGuinness said.

But Cowen loyalists said McGuinness and other rebels wouldn't be able to gather the 18 signatures required for a no-confidence vote to be scheduled.

Cowen conceded Monday night he must call an election next year but sought to delay it as long as possible. His hand was forced when the junior party in his coalition, the Greens, said it would withdraw support once the 2011 budget passed.

The Greens said they expected the country to hold an election by late January, but Fianna Fail officials say the budget will require multiple votes on different tax increases, which could drag the process into February.

The Fianna Fail minister for tourism and the arts, Mary Hanafin, accused the Greens of undermining Ireland at a critical moment.

"I'm not sure they (the Greens) have shown they have the best interests of the country at heart," Hanafin told Irish state radio RTE.

Hanafin said she wouldn't back any push to oust Cowen — but would put her name forward if the leader's post became vacant.

At the European Parliament in Strasbourg, France, EU monetary and financial affairs minister Olli Rehn gathered Ireland's 12 European lawmakers for a confidential briefing — and came out stressing they must stop the political infighting long enough to pass the 2011 budget.

"It is essential that Ireland pass the budget in the timeline foreseen, and sooner rather than later, because every day that is lost increases uncertainty," Rehn said.

Cowen pleaded with opponents not to force him from office until the budget becomes law and the EU-IMF money is flowing into Irish banks. But opposition lawmakers emphasized they were determined to oust him as soon as possible in pursuit of a pre-Christmas election.

"What's the point of a government preparing a four-year plan that they won't preside over, that they won't be there to implement, and that they haven't consulted the people on?" said Fine Gael lawmaker James Reilly.

Reilly and Labour lawmakers both contended that, if Cowen resigned immediately and dissolved parliament, an election in mid-December could lead to the new government's revised budget being passed by Christmas. Dempsey of Fianna Fail, however, called that schedule "quite impossible."

Labour and Fine Gael are refusing to say whether they will actually vote against the budget, should Cowen survive to Dec. 7. If either party's members abstained, the budget would pass by default.

"It may be the case that the main opposition parties will abstain on the vote. It's imperative they do that in the national interest," said Dermot O'Leary, analyst at Goodbody Stockbrokers in Dublin.

Shares in Ireland's three remaining banks on the Irish Stock Exchange tumbled for a second day Tuesday as investors foresaw increasing bailouts and state control as inevitable.

Patrick Honohan, the Irish Central Bank governor, fueled those fears with a speech Tuesday to Dublin accountants. He said Ireland's bank-rescue efforts were right in theory but had failed to restore the confidence of foreign investors, who have withdrawn tens of billions' worth of deposits since the summer.

He said Irish banks must greatly increase their own reserves in response and actively seek foreign buyers.

"They're all for sale as far as I'm concerned," he said of Ireland's six banks, three of which have already been nationalized.

Bank of Ireland shares plummeted 33 percent to a new record low of €0.26 before recovering slightly. Allied Irish Banks fell 17 percent to €0.34. Insurance and mortgage specialist Irish Life & Permanent — Ireland's only bank yet to receive a state bailout — shed 9 percent to €0.76, then recovered virtually all of its losses in afternoon trade.

The government already owns 36 percent of Bank of Ireland and 18 percent of Allied Irish. The latter bank expects to hand more than 90 percent ownership to the government next month after it offers €6.6 billion in new, overpriced shares for sale — and finds the government is the only buyer.