UPDATE 2-Ireland’s Fin Min signals even more pain ahead

* Cowen trying to shore up majority ahead of budget

* Irish credit spreads wider, uncertainty over Anglo lingers

* Bank shares rise after Allied Irish Banks raise capital

(Recasts with comments from finance minister)

By Carmel Crimmins

GALWAY, Ireland, Sept 13 (BestGrowthStock) – Ireland may have to
squeeze even more from next year’s budget deficit than
previously expected, the finance minister said on Monday, as the
government sought to shore up its parliamentary majority.

Fears the former “Celtic Tiger” economy is on the verge of a
full-blown debt crisis have sent its borrowing costs soaring and
the government needs to tackle the worst budget deficit in the
European Union to reassure investors and bring yields down.

With the possibility the final bill for dealing with
nationalised lender Anglo Irish [ANGIB.UL] will top 25 billion
euros, Finance Minister Brian Lenihan signalled he may need to
go beyond the 3 billion euros in adjustements previously
targeted for his December budget.

“The figure of 3 billion is a minimum, but clearly
government will have to go through the different departments,”
Lenihan told reporters at a meeting of the main government
Fianna Fail party in Galway.

“We have to look at what can be saved and what the correct
position is.”

Lenihan’s gloomy pronouncement will not help Prime Minister
Brian Cowen’s efforts to rally his party to support the cutbacks
in the face of public dismay and his own slim parliamentary
majority.

Conscious that he needs to shore up his support, Cowen
signalled that he would like to woo back four party members who
resigned their membership of the parliamentary party.

He also reminded backbenchers, some of whom are feeling
uneasy about the negative headlines surrounding Anglo Irish
Bank, of the need to take tough measures.

“We have to show the outside world that we can fix our
problems and that we can pay our debts,” he said in a speech.

“There is more to this country than Anglo-Irish Bank.”

The cost of propping up Ireland’s banking sector after a
disastrous property binge is expected to blow out its budget
deficit this year to a jaw-dropping 26 percent of Gross Domestic
Product, Goodbody Stockbrokers has estimated.

But even without that one-off expense, the shortfall is
still expected to be around 10 percent next year on an
underlying basis, over three times an EU limit of 3 percent,
according to the latest Reuters poll.[ID:nLDE67U1IG]

ELECTION NEXT YEAR?

Last week, Cowen unveiled a plan for dealing with the
banking crisis and winding down nationalised lender Anglo Irish
but investors are still waiting for the final bill.

Uncertainty over the cost of dealing with Anglo sent
Ireland’s risk premium rising again on Monday with the premium
investors charge to hold Irish debt over German bunds at 360
bps, some 16 bps wider than Friday’s week-long low.

Lauded overseas for taking action to deal with the fiscal
crisis, Cowen’s leadership at home has been questioned and he
has faced criticism that as a former finance minister, he failed
to prevent the property bubble at the root of Ireland’s woes.

The next election is scheduled for 2012 but analysts have
said the government could fall before then, particularly if
polls for three vacant parliamentary seats are held next year.

In some rare good news for Ireland’s financial sector,
shares in Allied Irish Banks and domestic peers rose on Monday
after AIB took its first step towards meeting Ireland’s tough
new capital rules.

“Anglo will be resolved, time does move on,” said Ciaran
O’Hagan, a bond strategist at Societe Generale in Paris.

“(But) the budget deficit is a recurrent cost so it really
cuts to the heart of the credibility of the state.”
(Editing by Angus MacSwan)

UPDATE 2-Ireland’s Fin Min signals even more pain ahead