Ireland needs Europe's help for debt deal to deliver

Fri Feb 8, 2013 10:28am EST

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* Irish PM promises deal will cut future austerity by 20 pct

* Govt will face some calls to use extra cash as a buffer

* Fin min already under party pressure to ease cuts

By Padraic Halpin

DUBLIN, Feb 8 (Reuters) - Ireland promised austerity-weary voters that a bank debt deal struck this week will soften future budget cuts but its improved fiscal sums still rely on the European outlook improving, a risk that could yet trip the government up.

Irish Prime Minister Enda Kenny hailed the long-awaited deal with the European Central Bank to ease the country's debt burden, which sent borrowing costs down to pre-crisis levels. as an "historic step" on the economy's road to recovery,

It also puts Dublin on course to exit an EU/IMF bailout this year and both Kenny and finance minister Michael Noonan pledged that voters would see the benefits through a 20 percent cut to the 5.1 billion euros in austerity still needed by 2015.

Others, including perhaps the European Commission, may rather Ireland ferret away the extra 1 billion euros to guard against nasty economic shocks but Noonan was already coming under pressure from backbenchers 24 hours after the deal was struck.

"It will have to manifest itself in the budget otherwise it's just talk," Michael Conaghan of the junior coalition Labour party, who said the mood in his hard-hit, inner-city Dublin constituency had lifted, told Reuters.

"I think we need to see some tangible, practical benefits in the budget that ordinary people can see in their own lives, that is their expectation. Certainly we backbenchers will be trying to ensure that this happens.

"Simply to hold it all back in case there's another rainy day and I'm sure there'll be a rainy day ... We have to lift some of the rain that fell on us for the last six or seven years."

With unemployment stuck above 14 percent for the past 2-1/2 years and one in six mortgage holders unable to fully meet repayments, relief to a relentless austerity drive that began six years ago would help the struggling domestic economy.

But officials in Noonan's own department cautioned that the leeway Thursday's deal provides is just one variable feeding into the budget, highlighting this year's tax take, the ability to curb spending and events abroad as being among the others.

EASE AUSTERITY?

After Dublin beat last year's deficit target of 8.6 percent of annual output, still among the highest in Europe, the country's central bank warned that it should not ease up its planned fiscal adjustment effort.

That is because weaker external demand will continue to hit the export-led economy this year, it said, and although Ireland has avoided joining much of the euro zone in recession, the bloc's debt crisis has forced it to consistently scale back growth forecasts.

To reduce its budget deficit to the EU-required level of 3 percent by 2015, Dublin needs economic growth to jump to 2.5 percent next year from an estimated 0.9 percent in 2012.

A member of the Irish Fiscal Advisory Council, the country's independent fiscal watchdog, said whatever the domestic political imperatives, pressure would be brought to bear to stick to Plan A and use the extra cash as a buffer.

"Politicians, especially moving into the second half of their administration, are going to be inclined to ease up on the adjustment so they will want to use as much money as possible to ease off on austerity," Alan Barrett said.

"But they will have people like the fiscal council to answer to, the European Commission will have an input and the council has been arguing that our debt sustainability, even with this, is far from secured. There may be an argument for using some of the extra billion to accelerate the pace of adjustment."

With opinion on the front pages of Friday's newspapers split between Thursday's deal providing a turning point and simply leaving future generations saddled with billions of debt, Noonan would find such an argument a near impossible political sell.

Analysts say the coalition, which is starting to feel the heat in opinion polls, will be sorely tempted to cash in on the windfall the bank debt deal has provided.

"The only thing that was going to bring this government down was maybe the absence of deal that would have put pressure on coming up to the next budget," said Eoin O'Malley, a politics lecturer at Dublin City University (DCU).

"But if you don't see some sort of tangible outcome at the next budget, then there's no point in having this deal." (Reporting by Padraic Halpin, editing by Mike Peacock)

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