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Irish plan 4-year cuts as IMF studies debt crisis

By Shawn Pogatchnik

Associated Press

Published: Sunday, Nov. 21 2010 5:30 a.m. MST

DUBLIN — Ireland's government gathered Sunday to finish a four-year plan for slashing €15 billion ($20.5 billion) from its annual deficits, an unprecedented austerity push designed to keep the country from bankruptcy and minimize the need for an IMF-EU bailout.

The office of Prime Minister Brian Cowen said the 15-member Cabinet would put the finishing touches on the austerity plan. It has been in the works since September, runs to 160 pages and is expected to be publicly unveiled Tuesday.

The government says the still-confidential plan has been endorsed by dozens of experts from the International Monetary Fund, European Commission and European Central Bank, who descended Thursday on Dublin to begin poring over the debt-riddled accounts of the government, treasury and banks.

Speaking before Sunday's meeting, Cowen stressed that Ireland would not raise its 12.5 percent rate of tax on business profits, its most powerful lure for attracting and keeping 600 U.S. companies based here. France, Germany and other eurozone members have repeatedly criticized the rate as unfair and say it should be raised now given the depth of Ireland's red ink.

Cowen said he wouldn't be budged by such arguments, calling the 12.5 percent rate — less than half the eurozone average — "a cornerstone of our industrial strategy."

Eurozone governments launched the IMF-EU mission after the European Central Bank — the ultimate arbiter of the 16-nation euro currency area — expressed private misgivings about the flight of corporate deposits from Ireland's banks since the summer.

In recent weeks Dublin banks have reported losing 10 percent to 17 percent of their deposits, and the Frankfurt-based ECB had to fill the gap with its own loans totaling a reported €130 billion, one quarter of the central bank's entire loan book.

Ireland's ECB representative, Irish Central Bank governor Patrick Honohan, says he expects Cowen's government to accept an EU-IMF emergency fund worth tens of billions of euro that would be used by Ireland's banks as a credit facility. He says the measure would reassure foreign banks and clear the way for Irish banks to resume borrowing on open markets at lower rates.

Ireland is struggling to reduce its deficits to the eurozone limit of 3 percent of GDP by 2014. This year's deficit is set to reach a modern European record of 32 percent, chiefly because of Ireland's ever-escalating costs of bailing out five Irish banks.

Analysts say the flight of capital from Ireland's banks accelerated in August as rumors swirled that Ireland had greatly underestimated the bailout costs. Finance Minister Brian Lenihan in September published a Central Bank report claiming the total bill would fall in a range of €45 billion-€50 billion ($62 billion $69 billion) bailout of five banks, presuming no further shocks to the system.

Since then, however, the size of the recent cash flight from Ireland's banks has appeared to catch the government off guard.

Ireland this year is expected to collect €31 billion in taxes but spend more than €50 billion, chiefly on its bloated civil service and welfare programs. The plan in the works would narrow this gap by €6 billion in 2011 through €4.5 billion in cuts and €1.5 billion in new taxes.

The 2011 budget faces a difficult passage through parliament when it is unveiled Dec. 7. Cowen has an undependable three-vote majority. It is expected to be reduced to two following Thursday's by-election to fill a seat that had been left empty for 17 months.

Analysts expect Cowen's Fianna Fail party to lose that by-election as well as three others tentatively scheduled for the spring. That would leave him without a majority and force an early election.

Cowen and his long-dominant party are languishing at record lows in opinion polls. The latest survey published in the Sunday Business Post newspaper said Fianna Fail has just 17 percent support, whereas the two main opposition parties, Fine Gael and Labour, command 33 percent and 27 percent respectively.

Those two parties are widely expected to form a center-left government after Cowen loses his majority — either by failing to pass the 2011 budget next month or, more likely, after losing all four by-election races.

Reflecting the national mood, the Sunday Independent newspaper displayed the photos of Ireland's 15 Cabinet ministers on its front page, expressed hope that the IMF would order the Irish political class to take huge cuts in positions, pay and benefits — and called for Fianna Fail's destruction at the next election.

"Slaughter them after Christmas," the Sunday Independent's lead editorial urged.

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