Ireland’s in Trouble . . . Again. For Real This Time?

To start the week this morning, it seems clear that the next flash point of the ongoing European Crisis will not be Portugal or Spain or Italy, as had been anticipated—it’ll be Ireland. Again.

The Green Party, who only had six seats out of 166 in the Dáil Éireann (Irish lower house), have pulled out of Prime Minister Brian Cowen’s governing coalition over the weekend. This has triggered the election that everyone feared, and which Cowen’s Fianna Fáil’s party will lose—and a scramble to pass an Irish budget before that happens.

The reason to pass the budget is, the €85 billion rescue package set up by the IMF and the UCB will not flow Ireland’s way, until they’ve implemented the austerity budget—which is hugely unpopular. Compare the €6 ($8) billion in higher taxes and spending cuts of the austerity budget, to the €35 billion in total Irish tax receipts and fiscal income.

The Irish austerity budget is gonna hurt—bad.

Now, people inside the government and what remains of the coalition are saying that the budget will be passed before the election—and so do a lot of outside observers; per Bloomberg:

“It looks like the finance bill will pass,” said Kevin Rafter, a professor at Dublin City University who has published books about Irish politics, including a history of Fine Gael, the biggest opposition party. “All the parties want it off the table before the election.”

The opposition Labour party says it will support the Fianna Fáil on the budget, so long as elections are called for no later than February 25—and of course the budget is passed before that.

Everyone might want that bitter pill to be swallowed before the election—but that doesn’t mean it will necessarily happen. Recall that, immediately after the announcement of the bailout package—and severe austerity measures—there was a protest in Dublin, with between 50,000 and 100,000 marchers.

Realize, too, however that Cowen’s governing coalition is a lame duck without the Greens: If the budget is passed before the election, popular sentiment will turn against Fianna Fáil, killing their election chances. So it might be to the back-benchers’ advantage to not pass a budget, and claim they were not doing it in order to protect Ireland from the money grubbers of the IMF and ECB, and the UK banks that hold so much of Ireland’s debt (and were key players in pushing through a bailout in December).

Cowen’s government last week lost four ministers—four. The whole governing edifice is crumbling. And Cowen does not have the personal well of loyalty to prevent backbenchers from maintaining party discipline. So it could well be to the inidividual Fianna Fáil MP’s advantage to not pass the budget.

As of this morning, the spread on the Irish bond over the German 10-year is 5.810%, up a mere 5 basis points from Friday’s close of 5.768%. So there is the generalized sense that the markets had already factored in the collapse of the Cowen govenment.

Stay tuned . . .