FACTBOX-Key political risks to watch in Ireland

DUBLIN, July 1 (BestGrowthStock) – Ireland’s early and sharp fiscal
reforms have pointed the way for other heavily indebted euro
zone members but its sluggish economic recovery and banking woes
mean a Greek-style crisis remains a possibility.

After the end of a decade-long property bubble triggered
fiscal and banking crises — battering Ireland’s prized ‘Celtic
Tiger’ economy in the process — Dublin has hiked taxes, curbed
spending and slashed public pay to halt a soaring deficit.

Following are some of the key factors to watch:

BANK PLANS WIDE OPEN BY MARKET TURMOIL

Ministers played down Irish sovereign debt fears after an
article in May by University College Dublin economics professor
Colm McCarthy suggested Ireland’s problems could eclipse
Greece’s due to its state guarantee for bank liabilities.
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Europe’s main ratings agencies, which all stripped Ireland
of its prized AAA rating in 2009, have broadly backed Dublin’s
banking strategy, with Fitch saying the potential 22 billion
euros needed by nationalised Anglo Irish Bank [ANGIB.UL] would
make little difference to the country’s sovereign rating.

Standard & Poor’s has warned of potential negative ratings
action should the cost of setting up a so-called “bad bank” and
a series of recapitalisations exceed expectations.
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Ireland laid out “once and for all” recapitalisation plans
for its banks in March, telling them to find up to 32 billion
euros by year-end to plug the hole left by risky loans moved to
the National Asset Management Agency (NAMA), the “bad bank”, and
to meet new regulatory requirements.

However, market turmoil could affect the ability of lenders
to raise the capital themselves and possibly require further
state intervention.

Bank of Ireland (BKIR.I: ), the country’s largest bank by
market value, has raised 3 billion euro of fresh capital, much
of it from private sources. Rival Allied Irish Banks (ALBK.I: ) is
in the process of selling some of its most profitable units and
needs to launch a rights issue later this year.

Should investor appetite remain weak, the state’s input into
the 7.4 billion euros Allied Irish needs will increase, leaving
taxpayers owning as much as 80 percent of the bank’s shares.
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Dublin argues it will be able to sell the stakes over time
but the same cannot be said for Anglo Irish or state-controlled
Irish Nationwide Building Society. While their fates lie with
the European Union, the government risks increased voter anger
with each billion it pumps into them. [ID:nWLB1639]

What to watch:

— Dublin wants to gradually phase out its bank guarantee
scheme, but banks first need to show they can stand on their own
feet. Brussels approved extending the guarantee until the end of
the year to allow time to get capital levels in order.

— Progress on Allied Irish’s capital raising. Dublin wants
to showcase Bank of Ireland’s plan as an example for others but
should markets remain volatile, Allied Irish may not raise
enough from the asset sales.

— Any move to wind down Anglo or Irish Nationwide should be
watched carefully to see if markets are willing to accept such
action without punishing other Irish banks and what additional
costs it would entail for the sovereign. The EU Commission may
not rule on their restructuring plans until early next year.

– Further banking wobbles could hit not only shares in the
sector but potentially push up Irish sovereign bond yields and
widen credit default swap (CDS) spreads.

EXPOSURE TO EU-WIDE CRISIS

Ireland faces no major bond redemptions this year and has
made fast progress towards its 20 billion euro bond issuance
target for 2010 — roughly the same amount the government
collects in the two main taxes, income and value-added,
combined. It considered skipping an auction in May amid upward
pressure on yields, and an economist who helped devise the
austerity package said in June borrowing costs remained above
sustainable levels.

Even if Dublin needs to skip an auction or two, the fund
raising target would likely be met but the country’s debt agency
usually likes to prefund for the following year.

External pressures could wreck Ireland’s plans to bring its
deficit to below 3 percent of GDP in 2014 as it relies on an
export-led recovery dependent on a global upturn. That prompted
the OECD and the IMF to warn that Dublin’s medium-term fiscal
strategy rests on an optimistic macroeconomic scenario after
2010.

What to watch:

– The next monthly bond auction is scheduled for July 20
when all eyes will be again on how much Ireland will pay. Yields
rose sharply in June and are likely to stay that way for now.

– The government will want to remain the euro zone’s shining
example of fiscal consolidation by pushing through 3 billion
euros of savings in December’s budget for 2011.

– Ireland officially exited recession in the first quarter
but analysts say sustained recovery is still some way off. The
government has forecast a return to “measurable” growth around
the last quarter of 2010.

WILL THE GOVERNMENT, MINISTERS SEE OUT TERM

The greatest risk to Ireland’s cabinet is Finance Minister
Brian Lenihan’s health after he said in January he would only
carry out essential duties while undergoing therapy for cancer.

Lenihan has said treatment was proceeding satisfactorily but
policy continuity would be a concern were his condition to
deteriorate since he is the main architect of fiscal reform.

Prime Minister Brian Cowen’s unpopular government, entitled
to remain in office until 2012, is under pressure to hold
by-elections to fill three empty lower chamber seats. His thin
majority would shrink to just three unless his Fianna Fail party
snapped a 28-year trend of governing party by-election losses.
He is not obliged to call a vote and will likely put them off as
long as possible, at the very least beyond a December vote on
the 2011 budget.

What to watch:

— Lenihan had so far carried out all essential duties like
attending EU finance ministers’ meetings, parliamentary debates
and media appearances. Any change will be carefully monitored.

— How long can Cowen put off by-elections? His minority
government partner, the Green Party, is pushing for a first
Dublin mayoral election this year, which could see at least one
by-election being held. Any more by-elections could make
December’s budget vote even tighter than last year’s.

UNIONS/PROTESTS

Ireland’s traditionally peaceful industrial relations gave
way to unusually large protests last year against austerity
measures. However, reaction to December’s spending cuts has been
limited to low-key action by public sector workers without
causing major disruption to services.

The leader of Ireland’s biggest union has said he wanted to
avoid major industrial disruption because bond investors would
take fright from a prolonged confrontation.

On June 15 public sector unions approved a pay deal struck
with the government, which precludes further salary cuts and
should also limit the risk of strikes.

What to watch:

— With wage cuts off the table, Dublin will need to look
hard for much of the 3 billion euros in savings needed in budget
2011. Lenihan has already signalled 1 billion euros to be cut in
capital spending as well as limited scope to widen the tax base.
Were he to be bold and introduce a property tax, as suggested
last year by a government-appointed commission, he could find a
big chunk of that 2 billion at once, but the reaction from
heavily indebted home owners could be severe. Analysts have
called such a move political suicide.

For political risks to watch in other countries, please
click on [ID:nEMEARISK]
(Reporting by Padraic Halpin; Editing by Marie-Louise Gumuchian
and Andras Gergely and Paul Taylor)

FACTBOX-Key political risks to watch in Ireland