Last updated: January 24, 2011 1:24 am

Irish fiscal crisis still lingers in the wings

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Ireland’s financial woes have been temporarily eclipsed by a political crisis that on Sunday saw the government’s junior partners quit the coalition.

The Green party’s decision to pull out, leaving Fianna Fáil as a minority government, has almost certainly hastened the date of the general election, previously set for March 11.

Most analysts believe the move may well add to Ireland’s economic problems, fuelling market concerns about the political instability of this invalid of the 17-member eurozone just as some economic indicators start to improve.

Over the past six days Ireland’s opposition parties have looked on as the ruling Fianna Fáil seemed to have pressed the self-destruct button.

However, if polls prove correct it is Fine Gael and Labour that will form the next government and have to implement the bulk of the painful austerity measures outlined as part of the €85bn ($114bn) bail-out by the European Union and International Monetary Fund.

Both parties are committed to the fiscal goals agreed by the present government with the EU and the IMF. But both are also publicly committed to renegotiating parts of the deal.

Pat Rabbitte, Labour justice spokesman and former party leader, told Irish radio: “The first task of the new government must be to mount a diplomatic assault on the institutions of Europe to mend fences and to repair our reputation abroad so that we can renegotiate that agreement.”

Brian Hayes, Fine Gael deputy spokesman for finance, said his party too was committed to seeking a renegotiation of the deal.

The tough line may be an attempt to appeal to voters starting to feel the impact of the cuts on their pay and welfare payments. But some economists are worried a more populist approach by the likely incoming administration could make it more difficult to restore its credibility with markets.

Austin Hughes, chief economist with KBC bank in Dublin, takes a different view. “The markets may actually be marginally reassured that there is the lending programme in place from the EU and IMF. In the absence of that it would be a tall order for the NTMA [Ireland’s debt agency] to go to the bond markets.”

It is still not clear how the political impasse will resolve itself. The Green party move came just 24 hours after Brian Cowen had resigned as Fianna Fáil party leader, under fire over a botched cabinet reshuffle widely seen as an attempt to bolster his party’s election chances.

However, the Greens say they will support Fianna Fáil as a minority government if it can fast-track key legislation implementing the December budget. Passing the finance bill is one of the conditions for the release of funds under the bail-out.

Fine Gael and Labour also indicated on Sunday they would back such a move if Fianna Fáil committed to dissolving parliament on Friday. This would probably mean a February general election.

Brian Lenihan, the finance minister, who is standing to replace Mr Cowen as party leader, conceded on Sunday there needed to be an “acceleration” in the election time­table. But analysts say he will be arguing in meetings with the other parties for more time to pass the budget legislation.

For one thing, as a candidate in the Fianna Fáil leadership contest he does not want to be tied up this week steering legislation through its various stages.

A compromise seems likely. Mr Lenihan may well calculate that Fine Gael and Labour would probably extend the time­table if it meant the last stages of December’s deeply unpopular austerity budget were passed on Fianna Fáil’s watch and not theirs.

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