Irish government bows to pressure to hold by-election

DUBLIN (Reuters) - Ireland's government bowed to pressure from its junior party and the country's High Court on Wednesday to hold a late November poll to fill a vacant parliamentary seat that could cut its majority to just two.

The move further complicates Prime Minister Brian Cowen's tasks of passing the first of four austerity budgets through parliament in December and convincing investors and European partners that Dublin does not need a Greek-style bailout.

However with Irish borrowing costs breaching new highs every day this week, analysts still said they expected MPs would push through the 2011 budget, likely to be the toughest on record, knowing that the alternative was economic chaos.

"I think the guys on the street, never mind the TDs (MPs), realise it's a tough budget or it's the IMF," said Eoin Fahy, chief economist with Kleinwort Benson Investors.

Buoyed by a shock legal victory upholding their challenge that a vote in the Donegal South West constituency was overdue, opposition party Sinn Fein had said they would table a motion in parliament on Thursday calling for a contest to be held.

After Cowen's junior coalition partners the Greens indicated they would support the motion, the government said that despite its plans to appeal the High Court's decision, it would move on Thursday the law allowing the by-election to take place.

The government added that it stood by its prior decision to hold at least two polls to fill another three empty lower-house seats by early next year.

"I had previously indicated that the writs on those by-elections would be moved in the new year and that decision still stands," John Curran, the junior minister responsible for ensuring government MPs vote on side, told reporters.

The government could lose all three seats, likely prompting an early general election and main opposition party Fine Gael said it would push for the outstanding votes to be held sooner.

Analysts said that following the resignation of a government MP on Tuesday and the recent withdrawal of support from others, Cowen could also ill afford any more defections if he is to push through the first part of a four-year plan to get the worst budget shortfall in Europe under control by 2014.

"People are jumping overboard on almost a monthly basis, reinforcing the sense that it is going to be very difficult to get the budget through and that party discipline will be crucial," said Theresa Reidy, lecturer in politics at University College Cork.

SCUFFLES WITH RIOT POLICE

Irish taxpayers have already endured two years of fiscal tightening and the worst recession in the industrialised world.

The prospect of four more years of pain prompted thousands of students to protest. Scuffles broke out and glass bottles and eggs were thrown at police, when officers removed a group of people trying to occupy a lobby in the Department of Finance.

"I got hit a couple of times by one police officer," Mattie Kearney, a computer electronics student, told Reuters.

"Members of the socialist workers party occupied a building. They were looking for trouble. The police were given orders to remove any occupiers from the building, by force if needed, and they did.

"The riot shields came out and they formed a cordon. Next thing bottles of vodka were thrown at them, eggs. The guards struck back."

Ireland's unemployment rate stayed stubbornly close to 14 percent in October, data on Wednesday showed forcing many young people to emigrate in search of work. But despite years of downturn, violent protests and strikes have been rare.

Fears over German plans for bondholders to share part of the losses from future euro zone sovereign debt crises and concerns over Ireland's ability to deal with its crisis have sparked a sell-off in peripheral euro zone debt, particularly Irish paper.

The premium investors demand to hold Irish bonds over benchmark German bunds rose above 500 basis points for the first time on Wednesday and the cost of protecting Irish debt against default jumped to a historic peak. Anxious to soothe investor concerns, Ireland's Finance Minister Brian Lenihan has said he will unveil his 2011 budget goal and economic growth forecast later this week.

Analysts say Lenihan has to show that Ireland is willing to swallow a large chunk of fiscal pain in 2011 and is realistic about growth prospects if its borrowing costs are to come down.

"If they came out with a genuinely realistic growth forecast and if they came out with a high number for the budgetary adjustment required then I think it could actually tighten the spread but not dramatically," said Fahy.

(Writing by Carmel Crimmins; Editing by Ralph Boulton)