Irish Leader Faces Early Election After Bailout

Irish Prime Minister Brian Cowen (left) and Finance Minister Brian Lenihan i i

Irish Prime Minister Brian Cowen (left) and Finance Minister Brian Lenihan spoke to the media Sunday in Dublin after debt-stricken Ireland formally appealed for a massive bailout. Peter Morrison/AP hide caption

itoggle caption Peter Morrison/AP
Irish Prime Minister Brian Cowen (left) and Finance Minister Brian Lenihan

Irish Prime Minister Brian Cowen (left) and Finance Minister Brian Lenihan spoke to the media Sunday in Dublin after debt-stricken Ireland formally appealed for a massive bailout.

Peter Morrison/AP

Irish Prime Minister Brian Cowen said Monday that he will call an early national election next year once Ireland passes an emergency budget and negotiates a massive bailout from the European Union and the International Monetary Fund.

Cowen resisted pressure to resign immediately Monday after his coalition partner, the Green Party, said it would quit the government and force an early election in January. Several lawmakers in Cowen's own Fianna Fail party also called on him to go.

But Cowen said he wouldn't quit now because that would delay Ireland's deficit-slashing 2011 budget and the bailout negotiations.

Cowen said he would call an election once the budget is fully passed but declined to specify any date. Several budget votes aren't expected until late January or February.

The move came less than a day after the Irish government agreed to accept a massive bailout, prompting the Green Party to say it wants parliament dissolved in January for an early election.

A Green withdrawal would destroy Cowen's three-vote parliamentary majority.

"The relief ... to the coordinated rescue package has vanished following the onset of political turmoil," said Andrew Wilkinson, senior market analyst at Interactive Brokers.

Green Party leader John Gormley said his party would support Cowen through the Dec. 7 vote on the 2011 budget, as well as the related four-year plan and the expected flow of the bailout money in coming weeks.

"Leaving the country without a government while these matters are unresolved would be very damaging and would breach our duty of care," Gormley said. "But we have now reached a point where the Irish people need political certainty to take them beyond the coming two months."

The Irish are furious with the way their government has handled the crisis that forced their small nation — once known as the Celtic Tiger because of its roaring economy — to go cap in hand to the EU and the IMF for a Greek-style bailout. Frustration is likely to grow later this week, when the government unveils its four-year austerity program, including tax hikes and deep spending cuts.

A protester stops a car carrying an Irish official arriving for a cabinet meeting in Dublin. i i

A protester stops a car carrying an Irish official arriving for a cabinet meeting at the government building in Dublin on Sunday. Peter Muhly/AFP/Getty Images hide caption

itoggle caption Peter Muhly/AFP/Getty Images
A protester stops a car carrying an Irish official arriving for a cabinet meeting in Dublin.

A protester stops a car carrying an Irish official arriving for a cabinet meeting at the government building in Dublin on Sunday.

Peter Muhly/AFP/Getty Images

In more bad news for Dublin, the ratings agency Moody's said that an EU rescue makes the Irish banking problem more of an Irish government problem, which will probably mean a downgrade in the country's credit rating.

Irish Finance Minister Brian Lenihan said Monday that banks will be pruned down, merged or sold as part of the massive bailout taking shape. He also reiterated that a bailout — requested Sunday after weeks of Irish denials that it needed any aid — won't exceed euro100 billion ($137 billion), but noted that the total would become clear only after another week or two of negotiations with the IMF, the European Commission and the European Central Bank.

Lenihan said he agreed with European colleagues that the Dublin banks — which borrowed money aggressively and pumped it into runaway Irish, British and American property markets for a decade — needed to be cut down to size and refocused purely on supporting Irish savers, homeowners and businesses. Most of their remaining foreign assets "will have to be discarded," he said.

"Because of the huge risks they [Irish banks] took earlier this decade, they became a huge risk not only to this state, but to the eurozone as a whole," Lenihan said.

Ireland's finance chief said the loan will be a credit line for Ireland's mostly state-owned banks, which have been on life support for months, after running up huge losses with the collapse of a property bubble. The crisis has driven up the cost of borrowing for the Irish government, and also for other deficit-laden eurozone nations, notably Spain and Portugal. The European Union hopes the pressure will now be off those countries — though analysts warn that they, too, may need bailing out in the end.

Britain's finance minister confirmed Monday that the U.K. planned to support the massive bailout of Ireland with an $11 billion loan of its own. Although the U.K. doesn't use the euro, it is Ireland's closest neighbor and a major trading partner. British and German banks also are the biggest creditors of Ireland's broken banking system, and they risk massive losses if the rescue collapses.

The decision is producing some blowback among Britons who feel their country — which is already facing unprecedented public spending cuts — can't afford it. One newspaper reported that the loan will cost every British household the equivalent of $460.

European finance ministers quickly agreed in principle to the EU-IMF bailout announced Sunday, saying it "is warranted to safeguard financial stability in the EU and euro area." All sides said further negotiations loomed. The country will likely be forced to make further massive spending cuts and raise its very low rate of corporation tax.

"A request for aid is different from delivery, so there may be some early uneasiness in the market early in the week if there is some intensification in the rhetoric surrounding the terms and conditions of the bailout," said Daragh Maher, an analyst at Credit Agricole.

But there is a sense of relief that some sort of resolution is now in the offing, in light of the foot-dragging that marked the bailout of Greece earlier this year.

Financial markets initially reacted positively to news that Ireland finally asked to tap into the EU bloc's emergency fund. The euro and European stock indexes rose in early trading, but the gains had largely fizzled by midday on concerns about the remaining problems in countries such as Portugal and Spain.

Perhaps unsurprisingly, Spanish Foreign Minister Trinidad Jimenez was among the most enthusiastic about Ireland's bailout.

"It's good news, it's good news," Jimenez said as he arrived for a monthly meeting of EU foreign ministers in Brussels. "It means the EU mechanism and solidarity are working."

Other EU ministers said they had no real choice but to help Ireland stabilize its banks and cope with its mounting debts because, just like Greece in May, the 16-nation eurozone cannot allow one of its members to default.

"We are all in a very difficult financial situation," said Finnish Foreign Minister Alexander Stubb. "We are in this boat together and we will find a solution to this crisis together. And the reason is very simple: We cannot afford to leave one single country alone."

Lenihan said Ireland still has more than euro20 billion in its own cash reserves and hopes it can emulate South Korea, which got an IMF bailout in 1997 and returned to borrowing from open markets a year later.

"We're not bust. We have substantial cash reserves, and the EU recognize that," he told Irish state broadcasters RTE. He emphasized that Ireland hoped to keep as much of the EU-IMF loans on deposit as possible, because that could encourage normal lending at lower rates to resume sooner rather than later.

The EU-IMF fund taking shape would "demonstrate that Ireland has facilities available to it to enable it to go to the market ... that Ireland has a last resort," Lenihan said.

With reporting from Teri Schultz in Brussels and NPR's Philip Reeves in Lisbon, Portugal. This story contains material from The Associated Press.

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