FACTBOX-Key political risks to watch in Ireland

DUBLIN, Sept 1 (Reuters) - 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.

Unpopular Prime Minister Brian Cowen needs to keep junior partners the Greens and some unhappy members of his own Fianna Fail party on side if he is to keep Ireland's deficit-cutting drive on track and push through the fourth austerity budget of his term in December.

Below are some of the key political risks to watch.

BILL FOR BANKS

Ireland's biggest issue and Cowen's biggest headache is the escalating cost of bailing out nationalised Anglo Irish Bank, the lender that left Ireland with the biggest budget deficit in the European Union last year and threatens to widen it above 20 percent of gross domestic product (GDP) in 2010.

Dublin is awaiting a European Commission decision, expected later in September, on what to do with Anglo and Finance Minister Brian Lenihan said this will give clarity on the total cost. The government's initial preference for Anglo was to split it into "good" and "bad" banks but it has recently signalled that it could gradually wind Anglo down if it proved the cheaper option.

The Green Party has said it would prefer a quicker wind-down and members of Cowen and Lenihan's own party have stated publically that they would rather shut down the bank.

Later this year, Dublin will also likely significantly increase its stake in Allied Irish Banks (ALBK.I), the country's second biggest bank which must follow larger peer Bank of Ireland's (BKIR.I) lead in raising fresh capital to meet tougher regulatory requirements by the end of 2010.

What to watch:

-- The European Commission's preliminary verdict on the future of Anglo Irish. There have been media reports the EC is in favour of an orderly wind-down of the bank and Ireland's government has said Brussels' opinion will be key to any final decision.

-- Uncertainty over the cost of Anglo has pushed Irish borrowing costs to euro-era highs on the secondary market, raising the cost of Ireland's monthly bond auctions. Yields will likely remain high at the next regular auction on Sept. 21 unless a final bill is quickly worked out. The 10-year Irish/German government bond yield spread will also be watched carefully should any decision come from the EC.

-- Progress on Allied Irish's 7.4 billion euros capital raising. The bank said in early August it was aiming to sell its overseas assets by the end of September and raise more capital in the fourth quarter. PKO BP PKOB.WA, Poland's largest lender, France's BNP Paribas (BNPP.PA) and Spain's Santander (SAN.MC) have been reported as remaining bidders for a 70 percent stake in Allied Irish's Polish unit Bank Zachodni WBK BZWB.WA. [ID:nLDE6721DZ]

Santander has also been reported to be interested in buying a 22.5 percent stake in M&T Bank (MTB.N) which Allied Irish Banks is also selling.

STUTTERING RECOVERY

Economists polled by Reuters see Dublin undershooting its GDP targets for this year and next, undermining its chances of cutting the country's budget deficit to 3 percent of GDP by a European Union deadline of 2014 and suggesting that the politically difficult budget cuts needed may be larger than the authorities envisage. [ID:nLDE67U1FV]

The IMF has also said that slower-than-forecast economic growth would see the deficit shrink to 5.9 percent of GDP by the EU deadline and there have also been signs that economic data is softening, prompting some analysts to suggest that a nascent recovery may have already hit a wall. [ID:nLDE66D0F6] [ID:nLDE68010V]

What to watch:

-- Ireland's second-quarter GDP figures are due to be released at the end of September. After exiting the euro zone's longest-running recession in the first quarter, economists expect GDP to rise by 0.5 percent quarter-on-quarter and a 0.3 increase in GNP. Undershooting expectations would be a concern.

-- The government has said it will make 3 billion euros of savings in December's budget for 2011. A further faltering in Ireland's recovery could raise the need for more cuts. Will the government see this as necessary? More importantly, can they push even more unpalatable measures through parliament?

WILL THE GOVERNMENT'S MAJORITY SHRINK FURTHER?

Brian Cowen's majority has been gradually shrinking since he took over as Prime Minister in May 2008 and he has just six votes more than the opposition at 84 versus 78 -- four of those from independents and six from the Greens.

Four MPs from Cowen's Fianna Fail party have also had their party privileges revoked and although they have almost always sided with the government in parliamentary votes, Cowen cannot wholly rely on their support.

Some of his party have also missed votes due to ill health, most notably Finance Minister Lenihan who said in January he would only carry out essential duties while undergoing therapy for cancer. He has said treatment was proceeding satisfactorily but policy continuity would be a concern were his condition to deteriorate since he is the main architect of fiscal reform.

Cowen is also under pressure to hold by-elections to fill three empty lower chamber seats and his majority would become perilously thin unless his party snapped a 28-year trend of governing party by-election losses.

What to watch:

-- Irish MPs will return from a summer break of over two months in late September and Cowen will be under immediate pressure to draw a line under the Anglo issue while also facing dissent from some members of his own Fianna Fail party as budget cuts continue to hurt their constituents. More could break ranks if they are not placated.

-- How long can Cowen put off holding the by-elections? He is under no legal obligation to hold them before the next parliamentary elections and naming a date this year would make December's budget vote even tighter than last year's.

-- Lenihan's health.

UNIONS/PROTESTS

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 and not caused 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. Unions also approved a pay deal struck with the government, which precludes further salary cuts and limits the risk of strikes. [ID:nLDE64I135]

What to watch:

-- With wage cuts off the table, Dublin will need to look hard for much of the 3 billion euros in savings needed in the 2011 budget. Lenihan has already signalled 1 billion euros to be cut in capital spending as well as limited scope to widen the tax base. Where will he cut and what will the reaction be?

For political risks to watch in other countries, please double click on [ID:nEMEARISK] (Reporting by Carmel Crimmins and Padraic Halpin, Editing by Sonya Hepinstall)