UPDATE 3-Austerity pressure weighs on Irish government

Fri Oct 14, 2011 11:29am EDT

Related Topics

* Senior minister speaks out against more austerity

* OECD recommends Ireland should beat fiscal targets

* PM insists there is no division in government

* C.bank warns banks on raising mortgage rates

* Credit Unions have provisions shortfall of around 300 mln euros

By Conor Humphries and Carmel Crimmins

DUBLIN, Oct 14 (Reuters) - A fresh call for Ireland to ramp up its austerity drive heaped pressure on Prime Minister Enda Kenny's coalition government on Friday as he brokered negotiations for his administration's first budget under an EU-IMF bailout.

Fissures have emerged in Kenny's cabinet over whether Dublin needs to make adjustments above 3.6 billion euros ($4.9 billion) next year to get the deficit, currently the worst in the industrialised world, down to 8.6 percent of Gross Domestic Product (GDP) from an estimated 10 percent this year.

Adding to the strain, the Paris-based Organisation for Economic Cooperation and Development (OECD) said Dublin should go beyond the 8.6 percent goal to help regain credibility among investors spooked by a deepening euro zone debt crisis.

"I don't want us to go beyond the 3.6 billion (euro) cut we have committed to," Energy Minister Pat Rabbitte told state broadcaster RTE before the OECD report was published.

"It's very easy to rhyme off figures and say we will go for more than planned," said Rabbitte, a senior member of junior coalition partner, the Labour Party.

"You sit around a table with figures in front of you in social welfare, in health, in education, in justice and see how difficult it is."

Unlike Athens, Dublin has won international praise for meeting its bailout goals and Kenny, who led his centre-right Fine Gael party to a historic victory in March, is determined to position Ireland as the first country to emerge from the currency bloc's debt crisis.

But a weakening growth outlook for next year means Ireland will likely have to go beyond 3.6 billion euros in spending cuts and tax increases just to meet its existing target.

The worsening crisis in Greece, meanwhile, is putting pressure on Dublin to do more to further distinguish itself from Athens in the minds of investors.

"In terms of your international credibility it's always better to overperform," Bob Ford, a senior OECD official said at a news conference in Dublin.

"But if growth gets weak, it may be difficult to perform, so to overperform might be too much to ask."

Kenny, who has been widely praised for his smooth working relationship with his more left-wing Labour colleagues, told state broadcaster RTE on Friday: "There isn't any division or any split."

BREATHING DOWN THE BANKS' NECKS

Unlike fellow bailout candidates, Greece and Portugal, whose economic problems are rooted in structurally weak economies, Ireland's financial crisis was triggered by reckless lending by its banks.

A devastating property crash and subsequent recession has sent mortgage arrears soaring and the country's central bank on Friday warned lenders they needed to tackle the problem of unsustainable debts quickly and fairly.

The central bank's deputy governor Matthew Elderfield summoned the heads of Bank of Ireland , Allied Irish Banks , permanent tsb and the EBS Building Society to a meeting this week to tell them he would be "breathing down their necks" over the arrears problem.

Banks risk enforcement action if they are not dealing with arrears fairly, he said.

"There is a core group where the financial circumstances are so dire they are going to lose ownership of their home and it is unfair to postpone dealing with that group because in some cases you are saddling them with more debt for the future," Elderfield told state broadcaster RTE.

Banks will have to provide the central bank with a quarterly report on the progress of their arrears strategy and Elderfield said bank directors would have to take personal responsibility for their arrears policies.

He also said the central bank may acquire the power to cap mortgage rates if banks did not stop hiking variable mortgage rates, some of which are as high as 6 percent compared to a European Central Bank base rate of 1.5 percent.

"It seems in many cases the banks are using variable rate increases as a way to compensate for a lack of profitability on their tracker books and that doesn't make sense to me in terms of fairness, but also from a practical matter that it is making the arrears problem worse," Elderfield said.

"I am saying to the banks that they are courting a policy response to cap their rates if they persist in doing this."

After recapitalising its banks, Ireland's government has said it will also recapitalise the credit union sector, community-based savings and lending clubs, by up to 1 billion euros.

A government-commissioned report on Friday showed that the country's 409 credit unions had a provisions shortfall of around 300 million euros after arrears nearly doubled in the space of two years.

Professor Donal McKillop, who wrote the report, said the credit unions may need less than 1 billion euros in extra capital unless conditions worsened.

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