Irish PM vows to pass budget, then call election

DUBLIN (Reuters) - Irish Prime Minister Brian Cowen defied mounting pressure to quit on Monday, saying he would stay in office until parliament passed an austerity budget needed to secure an IMF/EU bailout, then call an early election.

European partners and the International Monetary Fund agreed in principle on Sunday to rescue Ireland with an expected 80 to 90 billion euros in loans to tackle a banking and budget crisis that has aroused public fury.

Ireland's Greens, junior partners in Cowen's coalition, called on Monday for an early election in January as soon as the international bailout was in place.

Then two independent lawmakers on whom the government relies for support said they were unlikely to support the 2011 austerity budget, due to be unveiled on December 7.

With the main opposition parties calling for an immediate election, this meant the budget was unlikely to pass, and the EU/IMF aid package that will be contingent on it was likely to be delayed.

But Cowen appeared to be daring the opposition parties, Fine Gael and Labour, to block the budget -- and hold up the aid as well as the promised election -- when they could let it pass by abstaining.

"I don't think they should call an election before the budget because the whole basis of the IMF coming in would be undermined," said 39-year-old Dublin teacher Gerald Murphy.

Geoffrey Yu, foreign exchange strategist at UBS in London, said Cowen had thrown down the gauntlet to the opposition.

"But if you are a euro zone bond investor are you going to take that chance?" he said. "They won't be very impressed, but will they see this as a reason to sell off aggressively? We are not so sure either."

A top euro zone official said the first loans to Ireland could flow in January, but financial markets turned negative as investors assessed the new political uncertainty and the risk of pressure spreading to other vulnerable EU countries.

News of a bailout for Greece last May slashed the yield on Greek 10-year government bonds by 4.5 percentage points, halving the premium that investors required to hold Greek debt rather than low-risk German debt.

But Irish government debt prices have barely reacted to news of the latest bailout. In late European trading, the latest Irish 10-year bond was yielding 8.34 percent, over 5.5 points more than the German equivalent.

SHARES FALL

European shares fell and the euro, which hit a one-week high near $1.38 overnight on news of the package, dipped to around $1.3620 at 5 p.m. EDT on fears that it would not prevent contagion reaching Portugal and possibly Spain.

Irish stocks closed down 1.49 percent, while bank shares fell by about 20 percent on fears that equity holders will take the first losses.

Even if the Irish loans flow, economists doubted whether the second euro zone rescue in six months, after Greece, would stop markets targeting fellow straggler Portugal, or prevent heavily indebted EU states defaulting in the longer run.

Euro zone policymakers expressed greater optimism. "I don't think any immediate contagion effect could be the case," Jean-Claude Juncker, chairman of euro zone finance ministers, told reporters.

Portugal and Spain insisted their situation was different and they did not need help.

Moody's Investors Service said a "multi-notch" downgrade of Ireland's credit rating, still leaving it in the investment grade category, was now the most likely outcome.

While the rescue package is expected to be less than the 110 billion euros provided for Greece in May, it will be larger as a proportion of national wealth and in per capita terms.

AUSTERITY PLAN

European and IMF negotiators began thrashing out details of the rescue package as the Irish government put finishing touches to a drastic 15 billion euro ($20.5 billion) austerity plan.

Cowen said the government's four-year economic plan, to be announced on Wednesday, would involve 10 billion euros in public spending cuts and 5 billion euros in tax rises, on top of two years of harsh austerity and recession already endured.

It is expected to cut the minimum wage, slash social welfare spending, reduce the number of public employees and add a new property tax and higher income taxes.

But ministers said it would not touch Ireland's ultra-low 12.5 percent corporate tax rate, seen by some Irish as a symbol of national independence but as an irritant by many higher-tax EU countries.

Trade unions have warned that the austerity plan could provoke civil unrest: a student demonstration over planned fee increases turned violent this month, and unions have organized a march to protest at the planned measures on November 27 in Dublin.

A plan to restructure Ireland's banks, which had to be rescued by the state after a property boom fueled by reckless lending collapsed, will be a central plank of the package.

With the IMF expected to contribute about one-quarter of the package, the euro zone's contribution is likely to be about 50 billion euros, German Finance Minister Wolfgang Schaeuble told party colleagues in Berlin.

(Additional reporting by Jodie Ginsberg and Lorraine Turner in Dublin, Emilia Sithole-Matarise and Fiona Sheikh in London; writing by Paul Taylor and Jodie Ginsberg; Editing by Kevin Liffey/David Stamp)