THE HAGUE (Reuters) - The Dutch government will resign on Monday in a crisis over budget cuts, two broadcasters reported, spelling the end of a coalition which has strongly backed a European Union fiscal treaty and lectured Greece on getting its finances in order.
Prime Minister Mark Rutte will offer the resignation of his cabinet, which relies on the populist Freedom Party to get legislation through parliament, when he sees Queen Beatrix at about 0800 EDT (1200 GMT), broadcasters RTL and NOS reported.
Ministers declined to comment when they left a cabinet meeting. However, political turmoil in what is traditionally one of the euro zone's most stable and prosperous members jolted financial markets, already worried about the likelihood of a Socialist victory in French presidential elections.
The row erupted at the weekend when the anti-EU Freedom Party refused to agree with the centre-right coalition on how to cut 14 to 16 billion euros from the budget and get the Dutch deficit down to the EU target next year.
"I assume it is inevitable," deputy foreign minister Ben Knapen told Dutch news program RTL Z.
"It is important that everyone who bears responsibility stays calms and makes sure we get an orderly budget. We do have big problems," Knapen said before he entered a cabinet meeting.
New elections could be announced as early as Monday, and would most likely be held in September or October, analysts said.
Rutte and Finance Minister Jan Kees de Jager - who flew back from IMF talks in Washington when the crisis broke - have been among the euro zone's harshest critics of "budget sinners" such as Greece and Portugal.
The failure of Rutte, whose coalition has been in power since October 2010, to win agreement on cutting the deficit next year to the EU's ceiling of three percent of total economic output drew withering comment in Brussels.
"First you have a big mouth towards budget offenders and then you yourself can't deliver, and instead have to have new elections only one-and-a-half years after the new government took office," said one Brussels-based diplomat.
The Netherlands has been close to Germany in calling for tough austerity measures across the euro zone, and in supporting the EU's fiscal pact which must win parliamentary ratification by the end of the year in the countries whose governments signed up to the treaty.
In line with other euro zone countries, the Netherlands must tell the European Commission by April 30 how it will cut its budget deficit. With elections unlikely until after the summer, Rutte may try to cobble together an agreement with opposition parties so he can stay on at the head of a caretaker administration and meet the deadline at the end of this month.
Investors sold Dutch and peripheral euro zone bonds on Monday, driving yields on debt issues by struggling Spain above 6 percent.
The Dutch crisis flared at a time of wobbling support for the EU fiscal pact.
The Socialist frontrunner to win the French presidential election runoff next month, Francois Hollande, has promised to renegotiate the compact. This has alarmed financial markets, which fear he could throw the EU's commitment to fiscal discipline into question, although his aides insist he will not try to pick the treaty apart.
France has already lost its triple-A credit rating and the Netherlands may follow suit if it fails to make the budget cuts.
"Our competitiveness, credibility and triple-A status are at risk because Wilders has walked away. That is very costly. The interest rate on our state bonds can run up," former Dutch minister and current European Commissioner Neelie Kroes was quoted as saying in Dutch daily De Telegraaf.
The cost of insuring Dutch debt against default rose to its highest since January as the country slipped into crisis. Dutch five-year credit default swaps rose 9 basis points to 128 bps after the failure to agree on the budget with Wilders, whose party is outside the coalition.
"This represents a potential sizeable stumbling block to the already challenged fiscal compact," Rabobank said in a research note. "A failure on the part of a core country (and one we judge as 'true core' at that) to adhere to compact's deficit limits will represent a powerful debasement of the treaty."
The crisis would make it harder for Germany and other core members to sell the idea to voters that "bailouts are not a free lunch - they come with a policy straitjacket", it added.
additional reporting by Sara Webb; editing by David Stamp