Ireland's government unveiled a 15 billion euro (12.7 billion pound) four-year austerity plan on Wednesday that foresees deep spending cuts and tax increases to help pay for a catastrophic bank crisis and meet the terms of an EU/IMF rescue.
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.
Crucially, it retains economic growth assumptions unveiled earlier this month which many economists believe are over optimistic, given the likely effect of the cuts on already fragile domestic demand.
"It doesn't seem all that realistic to me," said Stephen Lewis, chief economist at Monument Securities. "It seems they're planning very stringent fiscal measures and yet they expect the economy to grow against that background. That seems highly unlikely." The Irish/German 10-year yield spread briefly widened to the day's peak of 660 basis points but later pulled back to 652. The euro, which has fallen sharply in recent days on fears of contagion from Ireland to other euro zone countries, barely budged.
The plan 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 16-nation common currency bloc's emergency ward.
A Reuters poll on Wednesday showed that 34 out of 50 analysts surveyed believe Portugal will be forced to follow Ireland and seek a bailout.
If that occurred, fears about Spain would grow and investors could begin to worry about the future of the currency zone that was set up over 11 years ago and regarded as a major success in its first decade of existence.
85 BILLION EUROS
Irish Prime Minister Brian Cowen told parliament no final figure had been agreed for EU/IMF financial assistance, "but an amount of the order of 85 billion (euros) has been discussed.
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, well before the first European and International Monetary Fund funds are set to arrive.
The European Commission said talks were progressing smoothly but would take several more days. "Hopefully it can be concluded around the end of November -- I cannot be more precise than that," a spokesman told reporters in Brussels.
Once a loan agreement is signed, it has to be approved by European finance ministers and the IMF board before the first funds can flow, and disbursements are likely to be linked to benchmarks such as the adoption of the 2011 budget.
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.
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."
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.