Factbox: Hurdles to Ireland regaining its financial reputation

DUBLIN (Reuters) - Ireland's financial headache worsened on Wednesday after a credit rating cut from Standard & Poor's pushed its borrowing costs higher.

Earlier touted as a role model for politically unpopular spending cuts in 2009, fears over Ireland's debt outlook have resurfaced due to the rising burden of bailing out its banks.

While analysts debate whether the banking woes will stop Dublin from cutting its budget deficit to 3 percent of gross domestic product by a European Union deadline of 2014, they agree a number of big challenges remain before investor faith in the country can be restored.

Failing to clear any one of the hurdles below would compound its problems.

BANK BILL

Ireland needs to give investors certainty about the cost of cleaning up its banks' decade-long property binge but a final figure is unlikely before the state-run "bad bank" finishes buying up assets from lenders, which it will largely have done by the end of this year.

The country's central bank governor said the net cost to taxpayers for dealing with nationalized Anglo Irish Bank ANGIB.UL may be as much as 25 billion euros and nearly 4 billion euros for two building societies. That could push the country's headline budget deficit over 20 percent of GDP this year from 14 percent in 2009.

Dublin is structuring the bank rescue in a way which allows it to spread the payments over 15 years but officials expect Brussels to include much of the hit upfront in the 2010 deficit calculations under European accounting methods.

Even with actual payments split over several years, the installment due for Anglo Irish next year is likely to raise Ireland's gross funding requirement by 2.5 billion euros, the national debt agency said last week.

The finance ministry has said it is on track to cap the "underlying" deficit at a target of 11.5 percent of GDP this year. The official deficit target for next year is 10 percent.

Officials are worried, though, that investors' perceptions could be skewed by a huge headline deficit figure.

On top of 14 billion euros of aid Anglo Irish has so far received since its nationalization in 2009, the European Commission this month approved further government support of up to 10 billion euros.

An EU decision on Anglo's proposed plan to split itself into a good bank and bad bank would also clear up uncertainty.

BANK REFINANCING

Ireland's banks need to wean themselves off a state guarantee of their liabilities and Bank of Ireland's (BKIR.I) expected testing of the public debt markets next month will be a litmus test of the sector and the economy's long term viability.

The banks are expected to be able to refinance 25 billion euros worth of debt next month but if they are not able to start accessing the public debt markets by year-end their funding needs will become a big issue.

ALLIED IRISH RECAPITALISATION

While Bank of Ireland has stocked up its capital base partly from private sources to satisfy tough new Irish regulations, Allied Irish (ALBK.I) still faces the prospect of majority state ownership unless it can raise the 7.4 billion euros of capital it needs elsewhere.

Investors are looking for updates next month on a possible sale of its Polish, American and UK businesses. A failure to seal some deals would be negative for overall market sentiment.

SLOW ECONOMIC GROWTH

Ireland exited the euro zone's longest-running recession in the first quarter and the government has built GDP growth of 4 percent from 2011 to 2014 into its fiscal plans.

The IMF has poured cold water on Ireland's growth targets and said it would fail to meet the EU-agreed deficit deadline.

Slower than forecast economic growth would force Ireland to find more savings than the 3 billion euros promised in each of its next two budgets.

REFORM FATIGUE

The chairman of Ireland's smaller governing party the Greens has raised the prospect that voters may not be ready to accept all the cuts envisaged by the government. He suggested that 2015 or even as late as 2020 could be a more realistic deadline for cutting the deficit to 3 percent of GDP.

The IMF said having already imposed austerity measures that culminated in 4 billion euros of spending cuts in last December's budget for 2010, Ireland risked "consolidation fatigue" setting in among voters.

POLITICAL INSTABILITY

Analysts think voters are likely to see parliamentary elections before the 2012 due date and some say Ireland's coalition, which has to rely on support from independents, could fall at any time.

Opinion polls suggest Ireland's main opposition Fine Gael and Labour would comfortably win that election and while both have promised to meet the EU's deficit targets, it is not clear how they plan to get there or if they agree on a route.

SOCIAL UNREST

Ireland's traditionally peaceful industrial relations gave way to unusually large protests last year against austerity measures. However, reaction to December's spending cuts has been limited to low-key action by public sector workers without causing major disruption to services.

The leader of Ireland's biggest union has said he wanted to avoid major industrial disruption because bond investors would take fright from a prolonged confrontation.

(Additional reporting by Padraic Halpin, editing by Mike Peacock)