Teetering Irish government to set out 4-year plan

DUBLIN (Reuters) - Ireland's teetering government will announce plans on Wednesday to cut welfare spending sharply and raise taxes to help pay for the country's catastrophic banking crisis and meet the terms of an international bailout.

The four-year plan to save 15 billion euros ($20.1 billion) is a condition for an EU/IMF rescue under negotiation for a country long feted as a model of economic development that has become the latest casualty in the euro zone's emergency ward.

Prime Minister Brian Cowen told parliament no final figure had been agreed for financial assistance, "but an amount of the order of 85 billion (euros) has been discussed.

The finance ministry said the austerity plan would be published at 1400 GMT and posted on the official website www.budget.gov.ie.

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, even before the first European and International Monetary Fund loans are likely to be disbursed.

Cowen said bank recapitalization details had not been finalized.

The government is set to take a majority stake in top lender Bank of Ireland, the only major bank not already under state control, after a crash in banks' share prices this week diluted shareholders' equity.

Ratings agency Standard and Poor's cut Ireland's credit rating to A from AA- and put it on negative watch, sending Irish sovereign bond spreads over safe-haven German Bunds even wider and the cost of insuring Irish debt against default higher.

An erosion of support from coalition partners this week means Cowen is unlikely to survive in office much beyond the New Year to implement the plans.

But his successor's hands will be tied by the terms of an agreement to be signed with the EU and the IMF, and Ireland's financial crisis will leave little scope to revise them.

"There has never been such a political shambles in the history of the State," Irish Times columnist Stephen Collins wrote. "The coalition crumbling just days before the publication of a four-year budgetary strategy has added a whole new layer of uncertainty to an already volatile situation."

One protester picketing parliament wore a sign around his neck proclaiming: "IMF****d & EU too?"

BUDGET IN DOUBT

Trade unions, student groups and pensioners plan a major demonstration against austerity in Dublin on Saturday but the head of the country's trade unions said he did not expect public anger to erupt into violent social unrest.

"It's not the case that people think the whole thing is inevitable, it's simply that they're much more law-abiding people who don't want a revolution," David Begg, general secretary of the Irish Congress of Trade Unions, told Reuters Insider television.

The four-year spending plan is the first step before Cowen can lay out his budget for next year on December 7, the fate of which could be in doubt. The IMF and EU offered assistance on Sunday, but say it depends on the budget being passed.

Publication of the austerity plan will raise pressure on the main opposition Fine Gael party to come off the fence and say whether it will back the budget, oppose it or abstain.

Leader Enda Kenny said on Tuesday the party would act in the "national interest," hinting it could let the budget pass in return for a firm date for an early election.

Bond markets that forced Cowen to apply for the bailout in recent days will be checking the four-year plan's sums and could punish Irish debt further if they think they do not add up.

Traders could dump Irish bonds if they feel it relies on unrealistic predictions of future economic growth, said Economist Alan McQuaid of stockbrokers Bloxham.

"The markets may feel that some of the projections are overly optimistic, and if that's the case they may push up yields accordingly," he said.

The euro continued to fall against the dollar as European officials sought to counter German Chancellor Angela Merkel's comment on Tuesday that the single currency was in an "exceptionally serious situation" due to the Irish crisis.

The chairman of euro zone finance ministers, Jean-Claude Juncker, said he did not think the euro was in danger, and European Central Bank governing council member Ewald Nowotny said he was irritated by Merkel's remark.

POLITICAL CRISIS

Cowen has said the austerity plan will mix about 10 billion euros in spending cuts with about 5 billion in tax increases by 2015. That adds up to around 3,700 euros per person in higher taxes and reduced government spending.

The government's deal with the EU and IMF requires it to achieve the first 6 billion euros of cuts next year.

Unemployment benefits and the minimum wage will be cut, state payrolls will shrink further and public sector pay will fall but Irish media said state pensions would be preserved.

Irish homeowners are likely to face a property tax for the first time, and many of the half of Irish workers who pay no income tax will be brought into the tax net. The government is certain not to touch its 12.5 percent corporate tax rate, one of Europe's lowest, which it calls a key to future economic growth.

Cowen rejected an opposition call on Tuesday to move the December 7 budget forward to next week, which the opposition said would allow an election before the year's end.

Voters in the former "Celtic tiger" have already endured two years of steep cuts in government spending, a collapse in house prices, a record-setting recession and a relentless surge in unemployment to 14 percent from around 4 percent.

Years of economic growth led to a property bubble and when it burst the government guaranteed the debt run up by banks, foisting most of the burden on to taxpayers.

(Additional reporting by Jodie Ginsberg, Lorraine Turner and Carmel Crimmins in Dublin, William James in London; writing by Paul Taylor, editing by Peter Millership)

(Dublin newsroom)

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