Ireland to vote on February 25

DUBLIN Tue Feb 1, 2011 12:52pm EST

Irish Prime Minister Brian Cowen watches as President Mary McAleese signs the proclamation of dissolution of the Irish parliament, at her official residence in Dublin, February 1, 2011. REUTERS/Cathal McNaughton

Irish Prime Minister Brian Cowen watches as President Mary McAleese signs the proclamation of dissolution of the Irish parliament, at her official residence in Dublin, February 1, 2011.

Credit: Reuters/Cathal McNaughton

DUBLIN (Reuters) - Ireland will vote on February 25 in the first general election in Europe dominated by the euro zone debt crisis and by demands to renegotiate an unpopular EU/IMF bailout.

The two main opposition parties are overwhelming favorites to replace outgoing Prime Minister Brian Cowen's scandal-racked administration. But with the economy in a prolonged slump and the fiscal straitjacket of the bailout terms, a new government will enjoy the shortest of honeymoons.

"This election will define our economic future and it will decide whether Ireland moves forward from this recession or whether we prolong it or indeed succumb to it," a somber-looking Cowen said before heading to the residence of President Mary McAleese on Tuesday to ask her to dissolve parliament.

Cowen, 51, widely blamed for mishandling a bank crash after a credit-fueled property bubble burst, saddling the country with debts as big as its annual economic output, announced on Monday he would not be seeking re-election to parliament.

Irish people are angry at having to endure years of cutbacks and tax increases to help pay for the 85 billion euro ($118.7 billion) bailout and the center-right Fine Gael party and the center-left Labour party, expected to form the next coalition, are campaigning to alter its terms.

"I'm confident that this can and will be renegotiated," Fine Gael leader and likely future prime minister Enda Kenny said.

Ireland may be granted longer to repay its rescue loans and a lower rate of interest, according to EU officials negotiating on crisis resolution plans likely to be adopted in March.

But the European Commission and the European Central Bank are set to reject Fine Gael and Labour demands to force senior bondholders in Ireland's shattered banks, whose reckless property lending sparked the crisis, to share the losses.

HANDS TIED

Kenny has acknowledged that his hands will be tied by Ireland's fragile domestic economy and its dependence on the support of the IMF, the Commission and the ECB.

He noted on Tuesday the growing support for giving Greece more time to pay back its EU bailout. Labour said on Sunday it would like to see Ireland given longer than the current period of around seven years to repay its loans.

The two parties have been at loggerheads this week over the deadline for Ireland to reduce its budget deficit to the EU limit of 3 percent of GDP, with Labour urging Brussels on Sunday to look toward giving Ireland an extra year, until 2016.

Such disagreements suggest a stormy start to government, and voters' expectations are low.

"Hopefully there will be some change but I'm not that optimistic," Eddie Riley, a 31-year-old teacher, said as he walked along Dublin's O'Connell Street.

Cowen's government is set to be the first to fall victim to the euro zone debt crisis with polls showing his Fianna Fail party faces a record rout. The hard-left, nationalist Sinn Fein may even challenge it for the role of largest opposition party.

As a former finance minister at the height of the "Celtic Tiger" boom, Cowen is tainted for failing to put the brakes on bankers and property developers. His application for assistance from the EU and IMF was the final humiliation.

His government descended into farce in recent weeks with the withdrawal of junior coalition partners, the Greens, the resignation of eight ministers, a thwarted cabinet reshuffle and his own resignation as party leader.

Irish despair at the political theater is compounded by the parlous state of what was once trumpeted as a model of a small, open European economy.

Lending to households dropped by more than 5 percent in December from a year ago while depositors continued to withdraw money with nearly 3 billion euros pulled out in December, data on Tuesday showed.

"Getting the banks back to some sort of "normal' lending practices should be the key objective of a new government," said Alan McQuaid, chief economist with Bloxham Stockbrokers.

Ireland submitted plans to Brussels on Monday to transfer the deposit books of two state-run lenders, including scandal-racked Anglo Irish Bank, and wind them down, meeting its first major banking deadline under the bailout.

Consumer sentiment picked up in January due to post-Christmas sales and improved weather, but economists warned against interpreting it as a turnaround.

"There must be some risk that when post-Christmas bills and post-budget pay packets are examined, sentiment could decline further in the next couple of months," said Austin Hughes, chief economist KBC Ireland.

Ireland is relying on exports to prop up growth this year and help it meet its fiscal targets. A survey on Tuesday showed manufacturing activity had grown at the fastest pace in almost 11 years in January due to export-driven demand.

But the trade upsurge is not expected to make much impact on stubbornly high unemployment with industrial employment accounting for just 13 percent of job numbers.

(Additional reporting by Matt Scuffham, editing by Paul Taylor)

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