for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up

Opposition and credit agency piles pressure on Irish PM

DUBLIN (Reuters) - Ireland’s drive to clean up its banks and tame its huge budget deficit hit trouble on Monday as a downgrade for Anglo Irish Bank rattled markets and the main opposition party said it would try to force a snap election.

The rising cost of rescuing the bank, nationalised during the banking crisis in 2009, has heaped pressure on already strained state finances of the former “Celtic Tiger” economy.

Analysts said any political vacuum would be a sell signal for investors, who are already worried about the ability of several euro zone governments to service their sovereign debt.

The euro briefly fell to an intraday low against the dollar on Monday after Moody’s agency cut its ratings on Anglo Irish Bank’s lower-grade debt to one notch above junk status, saying there was a risk that Dublin might default on the senior unsecured loans issued by the lender.

The risk premium demanded by investors to hold Irish government bonds rose, with the yield spread over their German equivalents widening on Monday by 14 basis points to 451 bps -- near a euro lifetime high of 453 hit last week.

While investors await a final figure for the cost of bailing out Anglo Irish -- expected later this week or early next -- they also became increasingly concerned about who would be making cuts of at least 3 billion euros (2 billion pounds) earmarked for December’s budget.

The opposition Fine Gael party announced a move aimed at getting Prime Minister Brian Cowen’s administration out of power immediately.

“We’re here to drive the government from office,” Fergus O’Dowd, Fine Gael spokesman for education told national broadcaster RTE.

“The government hasn’t got a clear majority, it can’t rely on its backbenchers. Fine Gael are saying we want an election, and we will put them to the sword on every vote we can.”

Cowen’s majority is in danger of shrinking to two seats after a member of his Fianna Fail (FF) party threatened to turn his back on the fast-sinking coalition on Saturday, a day after an independent MP withdrew his support.

Fine Gael announced it would withdraw much of the cover it provides for MPs absent from parliamentary votes. This spooked investors who fear that Cowen will not be able to push through reforms to tackle what is proportionately the euro zone’s biggest budget deficit.

“The markets have lost a bit of belief with the Irish story but they don’t have a problem with the current administration,” said Padhraic Garvey, strategist at ING in Amsterdam.

“There isn’t a magic solution by changing the administration, so it would be deemed a net negative because it just adds an extra unknown to the whole scenario and the political vacuum would be an excuse to sell.”

FUTURE COALITION FIGHTING

Cowen’s majority is in danger of shrinking to two seats after a member of his Fianna Fail (FF) party threatened to turn his back on the fast-sinking coalition on Saturday, a day after an independent MP withdrew his support.

He also needs stable relations with the Greens, the junior coalition partner.

But their chairman hit out on Monday at discontent in Fianna Fail’s ranks which has helped to cut the coalition’s majority from 15 seats before the economic crisis began.

“At times it frustrates that our discipline as a party isn’t being matched by some FF backbenchers cherrypicking the programme for government,” Green Chairman Dan Boyle said on Twitter.

Analysts and politicians agree that the budget should scrape through parliament despite Fine Gael’s move and the dissent within government ranks. But many think parliamentary elections will take place before the 2012 due date.

Fine Gael’s O’Dowd said his centre-right party would still maintain “pairing” arrangements -- where opposition MPs avoid voting when government members are absent on business -- on matters of national importance.

O’Dowd would not say whether Fine Gael would provide cover for Finance Minister Brian Lenihan when he makes an expected trip around Europe next month to brief investors and policy makers on Ireland’s economy and steps to tackle its crisis.

Opinion polls suggest that Fine Gael and centre-left Labour parties will sweep to power in the next election but the likely future coalition partners disagreed over how to get there.

Fine Gael’s stricter stance on pairing briefly threatened a trade mission to the United States by Deputy Prime Minister Mary Coughlan but Labour offered to cover for her while she was away.

“There will be other ways of taking out this government but not at the expense of the prospect for jobs in the education sector,” Labour’s education spokesman Ruairi Quinn said.

Additional reporting by Andras Gergely; editing by David Stamp

for-phone-onlyfor-tablet-portrait-upfor-tablet-landscape-upfor-desktop-upfor-wide-desktop-up