Business

Dublin set to unveil four-year austerity plan

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Media captionBrian Cowen: "An amount of the order of 85 billion has been discussed"

The Irish government is set to publish an austerity plan required for its EU- and IMF-led bail-out.

The four-year plan targets total cuts of 15bn euros ($20bn; £13bn), or 11% of the Irish economy's annual output.

Meanwhile, Taoiseach Brian Cowen confirmed he was negotiating a bail-out package with the EU and IMF, to be worth about 85bn euros.

On the markets, the euro continued to fall against the dollar, and yields on Irish government debt rose sharply.

Tax changes

At a heated session of the Irish Parliament, Mr Cowen said that bail-out negotiations were ongoing, and that no final figure had been agreed.

He described the package as an "overdraft", which would continue to be available and could be drawn upon as required, and stressed that the government would have had to borrow the money from international investors in any case.

Leader of the opposition Labour Party Eamon Gilmore called the package "one hell of an overdraft", before accusing Mr Cowen of giving a "bum steer [on the state of Irish banks] for a long time".

Despite continued questioning, Mr Cowen would not give any indication on how much of the bail-out funds would be used to recapitalise Irish banks. To give such market sensitive information would be "irresponsible", he said.

The BBC's business editor Robert Peston said about 35bn euros would be used to prop up the banks, with 50bn euros going to fill the state's funding gap.

Property tax

Later on Wednesday, the government will later provide more details of spending cuts and tax rises, including a hefty 6bn euros expected for next year, with the aim of bringing the government's budget deficit down to a target of 3% of GDP by 2014.

The measures to be introduced are expected to include the introduction of domestic water charges, a new property tax, a reduction in the minimum wage and social welfare cuts.

The government could also widen the tax net to take in some low-paid workers who currently pay no tax, and cut about 20,000 civil service jobs.

According to local media, the property tax could be phased in from 2012, with homeowners expected to pay an average of about 300 euros over the next two years.

The austerity plan will also outline how Dublin intends to reform its banking sector, in which it has needed to inject 45bn euros.

The government is expected to say it will inject more money into the banks, increasing their capital - the cushion against future losses - to 12% of assets from 8% currently.

The move would probably involve the government all but nationalising Allied Irish Bank and Bank of Ireland.

Their shares suffered sharp falls for the third consecutive day, with Allied Irish Bank down 17% and Bank of Ireland slumping 25%.

Euro weakens

Also on Tuesday, ratings agency Standard & Poor's downgraded its long-term rating on the Republic, from AA- to A, due to the large sums involved in the rescue package from the EU and IMF.

The downgrade reflects the agency's view that "the Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland's troubled banking system".

Despite continuing concerns about the Republic's debt crisis, global stock markets stabilised on Wednesday after sharp falls on Tuesday. The UK's FTSE 100 and France's Cac 40 indexes were slightly higher in early trading, while Germany's Dax was virtually unchanged.

However, the euro continued to slide against the dollar, falling almost one cent to $1.3313. It has now fallen by more than three cents against the dollar this week.

The yield on Irish government debt rose sharply to 8.69%, up almost 0.3 percentage points on the day. Bond yields give an important indication of the confidence that international investors hold in the Irish economy - the higher the yield, the lower the confidence.

Spanish government yields also rose, showing that investors are concerned that the country may be unable to tackle its high budget deficit without assistance.

Painful conditions

Some hints of the Irish austerity plan's contents have been provided by an IMF report on European economic reform that has been published on the Fund's website.

The IMF recommends that the Republic should gradually cut unemployment benefits the longer a person is out of work.

It also said the country should review its minimum wage - one of the highest in the eurozone - to bring it in to line with the general fall in wage levels.

The findings were approved for publication on Monday by the same senior IMF official who has been leading the team negotiating with the Irish government.

However, in comments on Tuesday, senior IMF official John Lipsky insisted that the political decisions would be up to the Irish government.

The size and details of the cuts are probably of secondary importance, says Marco Annunziata, chief economist at Unicredit Bank.

There is a risk that Taoiseach Brian Cowen's government may not survive the vote on its 2011 budget - the first austerity budget in the four year plan - due on 7 December.

It follows the possible loss of support of two independent members of the Dail, as well as of some of his Mr Cowen's Fianna Fail backbenchers.

"Markets are looking for whether or not the political consensus is sufficiently strong to support [the budget]," said Mr Annunziata.

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