The euro fell after Standard & Poor's cut Ireland's sovereign rating for the second time in less than three months, prompting investors to bet other euro zone countries' sovereign debt may be in the firing line. The downgrade raised the heat on Prime Minister Brian Cowen as he heads into a vote of no confidence in his government. The opposition Fine Gael party will table the motion on Tuesday and a vote will likely be held on Wednesday.
"The timing of this is bad for the government," said Alan McQuaid, chief economist with Bloxham Stockbrokers. "You'd have to assume that the opposition will use this as another thing to hit them with."
Cowen is expected to survive the motion but the odds he will lead the government till the end of its term of office in 2012 look weak after a record drubbing in local polls and two parliamentary by-elections at the weekend.
His party also lost a European Parliament seat to the Eurosceptic Socialisty Party, raising questions over Cowen's ability to lead the endorsement of the EU's reform treaty in a referendum later this year.
Irish voters are punishing the government for leaving them to pick up the bill after the economy's spectacular fall from grace following its debt-fuelled boom.
The junior coalition party, the Greens, warned Fianna Fail that another austerity budget in December, when Cowen needs to make politically difficult spending cuts to deal with the ballooning deficit, could make their partnership difficult.
The political uncertainty and the downgrade hit Irish banking stocks, with investors worried that an early general election would leave the government's "bad bank" plan in limbo.
Standard and Poor's warned it could cut Ireland's rating below AA amid concern about the soaring cost of bailing out the country's banking sector.
S&P said the top two lenders, the Bank of Ireland and Allied Irish Banks, would need more state capital.
In response, Finance Minister Brian Lenihan insisted his policies were putting the economy on the right track.
"It is important that we communicate a balanced perspective about Ireland and its economic, budgetary and financial situation and prospects," Lenihan said.
Election Needed?
Despite Lenihan's firm words, there are concerns the government will be steered away from its fiscally prudent path by a desire to keep the Greens and its own backbenchers happy.
"The political situation is clearly the key risk in Ireland," said Rossa White, chief economist with Davy's Stockbrokers.
Government officials have publicly ruled out any threat to Cowen's leadership but Defence Minister Willie O'Dea signalled there may be a cabinet reshuffle in the next 6-12 months.
"It is usual after about two years of a cabinet being put in position to reshuffle the pack, that is usual procedure in Irish politics," O'Dea told Newstalk radio.
Credit rating agency Fitch told Reuters Dublin may need to hold a parliamentary poll. "It may be that an election is needed to give a new government moral authority," Chris Pryce, a director at Fitch, said in an interview.
An exit poll for state broadcaster RTE and the Sunday Independent newspaper showed a coalition between right of centre Fine Gael and the leftwing Labour party would be the most likely outcome if a general election were held.
