Tension mounting over Irish budget cuts, as S&P cuts credit rating

Huge tax hikes, new levies in property and water and cuts to the dole and minimum wage are expected in the 150-page four-year budget road map.

Prime minister Brian Cowen has called for solidarity across the political system in Dublin, while social justice campaigners are demanding the poorest are spared.

Opposition parties were warned Ireland's bailout would only go ahead if swingeing cuts and tax rises and a more detailed €6 billion  budget on December 7, were passed.

The final loans figure has not been confirmed as negotiations with the International Monetary Fund and Europe are still ongoing.

Estimated figures range from €85 to €95 billion - but banking and economic experts have expressed concerns even that amount might not solve the problem.

They are also fears of a sustained bank run by fearful customers - Irish banks have already seen 23 billion euros (£19bn) in deposits leave the country this year.

The coalition government has support for its package of cuts from the Greens, who want a general election in late January, but two Independents - crucial to the fragile majority - are still wavering.

The legalities of passing a budget in Ireland mean the poll, which Prime Minister Brian Cowen has agreed to, may not be held until late February or March.

More pressure was added after the IMF issued a paper stating that minimum wage and dole payments should be cut.

The document said Ireland had to tackle its rising unemployment rate and should gradually reduce benefits over the time a person is out of work and impose stricter job search requirements.

Meanwhile, Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the government prepares to unveil a four-year deficit-cutting plan and contagion spread through the rest of the euro region.

“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,” S&P said in a statement late yesterday. Putting the rating on review for downgrade reflects the risk that talks on a European Union-led rescue may fail to stanch capital flight, it said.

S&P cut Ireland’s long-term rating to A from AA- and the short-term grade to A-1 from A-1+, the statement said. The reduction leaves its long-term grade five steps above Greece, which has the highest junk, or high-risk, grade.

The downgrade risks worsening an investor exodus from Irish bonds that has sparked turmoil through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to rescue its banking system. The extra yield that investors demand to hold Spanish 10-year bonds over German bonds yesterday surged to a euro-era record.