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Irish government unveils harsh austerity budget

Ireland has unveiled the harshest budget measures in its history, a four-year plan to claw back $20 billion using spending cuts and extra taxes.
A man carrying his tools walks near a graffiti in South Dublin
A man, carrying his tools, walks near a graffiti in South Dublin on Tuesday.Cathal Mcnaughton / Reuters
/ Source: Reuters

Ireland revealed an austerity plan to tackle its debt crisis and secure an international bailout on Wednesday and drew accusations of overconfidence in assuming the crippled economy can grow.

As tempers flared across Europe over the financial and social cost of rescuing Ireland, German Chancellor Angela Merkel said politicians must show financial markets who is in charge and make investors share in the risk of future debt crises.

Officials tried to soothe fears that Ireland's crisis would spread to Portugal, where workers staged a general strike on Wednesday, and beyond to bigger euro zone economies.

Slovakia's finance minister departed from the script, saying the risk of a euro zone break-up was "very real".

Irish Prime Minister Brian Cowen, whose government is close to collapse, unveiled a 15 billion euro ($20 billion) four-year austerity plan that he said would affect all Irish people.

"The size of the crisis means that no one will be sheltered from the contribution that has to be made towards national recovery," Cowen told reporters at a news conference.

The plan includes thousands of public sector job cuts, phased-in increases in Ireland's value-added tax (VAT) rate from 2013 and social welfare savings of 2.8 billion euros by 2014, but does not touch the country's ultra-low corporate tax rate.

It drew mixed reviews. "The plan strikes a good balance of durable expenditure and revenue measures, with due regard to protecting the least well off," EU monetary affairs chief Olli Rehn said in a statement.

But the credibility of the plan, which is vital for meeting the terms of the IMF/EU rescue package, came into question for sticking to economic growth assumptions unveiled earlier this month to widespread skepticism.

Credit rating agency Standard and Poors said Cowen's government was too optimistic in assuming growth and the Irish economy would struggle to expand at all in the next two years.

Dublin forecasts real GDP will grow an average 2.75 percent from 2011 to 2014. But S&P said nominal GDP -- not taking inflation into account -- would be close to flat in the next two years. "There is a meaningful difference," said Frank Gill, director of S&P's sovereigns rating group EMEA."

S&P cut Ireland's credit rating on Tuesday, saying it was likely to need to inject more funds into the banks, hit by a property market collapse in 2008 which forced the government into guaranteeing their liabilities.

"It seems they're planning very stringent fiscal measures and yet they expect the economy to grow against that background. That seems highly unlikely," said Stephen Lewis, chief economist at Monument Securities.

Debt sell-off
Investors have sold off Irish debt, particularly since Chancellor Merkel raised the possibility earlier this month that state bond holders might not get all their money back in future were another debt crisis to strike.

Merkel renewed her calls on Wednesday, defying criticism that she risks upsetting investors at a time when many fear a crisis which began in Greece earlier this year and moved to Ireland, might spread to other euro zone countries.

"Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?" she asked the German parliament.

"This is about the primacy of politics, this is about the limits of the markets," said the chancellor, acknowledging that her insistence on this issue was making markets nervous.

Merkel is talking about future government bond issues but holders of current Irish debt fear the risk of default.

Dublin's 10-year bonds are trading far below their face value, at less than 75 cents in the euro. On Wednesday they yielded 9.23 percent -- a level at which Dublin could not realistically issue new bonds.

The euro, which has fallen sharply in recent days on fears that Ireland's debt and budget crisis would spread to other euro zone countries such as Portugal and Spain, barely moved after the austerity plan.

Contagion is what European leaders fear most, especially if it affected a major country such as Spain which would be much more costly to rescue than relatively small economies such as Greece, Ireland and Portugal.

Irish Finance Minister Brian Lenihan played down this risk. "I have absolutely no doubt that Ireland will not cause any serious dislocation in the euro zone," he said.

But Slovak Finance Minister Ivan Miklos added to the gloom. "The risk of a euro zone break-up, or at least its very problematic functioning, is very real," he said.

A Reuters poll showed that analysts surveyed believe Portugal will be forced to follow Ireland and seek a bailout.

Ireland's austerity plan is a condition for EU/IMF aid under negotiation for a country long feted as an economic model and now the latest casualty in the 16-nation common currency bloc.

Cowen told parliament no final figure had been agreed for EU/IMF assistance, "but an amount of the order of 85 billion (euros) has been discussed".

The sudden implosion of Ireland's economy has bewildered its people. Unemployment -- a curse for generations of Irish which had almost lifted in the boom years -- has leapt to about 14 percent from about 4 percent in just a few years.

Anne Fullham, a 44-year-old property lawyer who lost her job in March, never dreamed she would find herself taking benefits. "When I was growing up ... it was the safest job you could possibly have -- if you're a doctor, a lawyer, an architect.

"We still all laugh about it in such a way that if you didn't, you'd cry," she said.

The Irish Independent newspaper said the situation was so critical that Dublin could pump extra cash into the ailing banks as early as this weekend. An erosion of support from the government coalition partners this week means Cowen is unlikely to survive in office much beyond the New Year to implement the plans.