Ireland austerity plan draws skepticism
DUBLIN (Reuters) - Ireland revealed an austerity plan to secure an international bailout, and officials gave mixed messages on whether its debt crisis could spread to other euro zone members or even endanger the common currency.
As tempers flared across Europe over the financial and social cost of rescuing Ireland, German Chancellor Angela Merkel said Wednesday politicians must show markets who is in charge and make investors share in the risk of future debt crises.
Ireland's finance minister rejected any suggestion his nation's malaise could infect other euro states like Portugal -- where workers staged a general strike Wednesday -- or Spain.
But Slovakia's finance minister said the risk of a euro zone break-up was "very real," prompting a leading European central banker to declare there was no way back in the euro project, and that financial crisis would not break the currency union.
Irish Prime Minister Brian Cowen, whose government is close to collapse, unveiled a 15 billion-euro ($20 billion) four-year austerity plan that immediately drew accusations of overconfidence in assuming the crippled Irish economy can grow.
"The size of the crisis means that no one will be sheltered from the contribution that has to be made toward national recovery," he told a news conference.
The plan includes thousands of public sector job cuts, phased-in increases in Ireland's value-added tax (VAT) rate from 2013 and social welfare savings of 2.8 billion euros by 2014, but does not touch the country's ultra-low corporate tax rate.
It drew mixed reviews. "The plan strikes a good balance of durable expenditure and revenue measures, with due regard to protecting the least well off," EU monetary affairs chief Olli Rehn said in a statement.
But the credibility of the plan, which is vital for meeting the terms of the IMF/EU rescue package, came into question for sticking to economic growth assumptions unveiled earlier this month to widespread skepticism.
Ireland's austerity plan is a condition for EU/IMF aid under negotiation for a country long feted as an economic model and now the latest casualty in the 16-nation common currency bloc.
Cowen told parliament no final figure had been agreed for EU/IMF assistance, "but an amount of the order of 85 billion (euros) has been discussed."
Credit rating agency Standard and Poors said Cowen's government was too optimistic in assuming growth and the Irish economy would struggle to expand at all in the next two years.
S&P cut Ireland's credit rating Tuesday, saying it was likely to need to inject more funds into the banks, hit by a property market collapse in 2008 which forced the government into guaranteeing their liabilities.
"It seems they're planning very stringent fiscal measures and yet they expect the economy to grow against that background. That seems highly unlikely," said Stephen Lewis, chief economist at Monument Securities.
THREAT TO EURO IS "VERY REAL"
Slovak Finance Minister Ivan Miklos expressed concern that the trouble might not be contained to Ireland and Greece, which needed a bailout from the EU and IMF earlier this year.
"The risk of a euro zone break-up, or at least its very problematic functioning, is very real," he said.
Irish Finance Minister Brian Lenihan played down this risk. "I have absolutely no doubt that Ireland will not cause any serious dislocation in the euro zone," he said.
Later, European Central Bank Governing Council member Axel Weber said he was convinced the euro would survive and that a financial safety net created by euro zone governments would be enough to withstand speculators.
"We must do everything to ensure the sustainability of the euro," said Wbere, who heads the German central bank. "There's no way back. What has grown together cannot and must not be split apart by a financial crisis."
Investors have sold off Irish debt, particularly since Chancellor Merkel raised the possibility earlier this month that state bond holders might not get all their money back in future were another debt crisis to strike.
Merkel renewed her calls Wednesday.
"Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?" she asked the German parliament.
"This is about the primacy of politics, this is about the limits of the markets," said the chancellor, acknowledging that her insistence on this issue was making markets nervous.
Merkel is talking about future government bond issues but holders of current Irish debt fear the risk of default.
Dublin's 10-year bonds are trading far below their face value, at less than 75 cents in the euro. Wednesday they yielded 9.23 percent -- a level at which Dublin could not realistically issue new bonds.
The euro, which has fallen sharply in recent days on fears that Ireland's debt and budget crisis would spread to other euro zone countries such as Portugal and Spain, barely moved after the austerity plan.
A CURSE FOR GENERATIONS
The sudden implosion of Ireland's economy has bewildered its people. Unemployment -- a curse for generations of Irish which had almost lifted in the boom years -- has leapt to about 14 percent from about 4 percent in just a few years.
Anne Fullham, a 44-year-old property lawyer who lost her job in March, never dreamed she would find herself taking benefits. "When I was growing up ... it was the safest job you could possibly have -- if you're a doctor, a lawyer, an architect.
"We still all laugh about it in such a way that if you didn't, you'd cry," she said.
The Irish Independent newspaper said the situation was so critical that Dublin could pump extra cash into the ailing banks as early as this weekend.
An erosion of support from the government coalition partners this week means Cowen is unlikely to survive in office much beyond the New Year to implement the plans.
(Additional reporting by Jodie Ginsberg, Lorraine Turner and Steve Slater in Dublin, Stephen Brown in Berlin and William James in London; Writing by Paul Taylor, Noah Barkin and David Stamp; Editing by Andrew Roche)
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