Will Irish bailout spark contagion?

Dublin finally asks for rescue package amid fears that Portugal and Spain will be next

The Irish government bowed to the inevitable last night and confirmed that it is requesting tens of billions of euros from international institutions to rescue its struggling economy and stricken banks.

It finally abandoned days of prevarication – characterised by the opposition as a vain pretence – that it had no need of any major aid package from the International Monetary Fund, the European Union and the European Central Bank. The request for assistance is now formally being lodged with these bodies, with officials from all three having spent several days in Dublin for talks which concluded on Saturday night.

The fact that a deal has finally been hammered out with the Irish government is unlikely to assuage fears that other eurozone members will need a bailout in the coming weeks. Commentators have expressed serious doubts that Portugal can continue without EU and IMF assistance, with a growing number also expressing doubts about the financial strength of Spain, and even Italy.

While there had been speculation that the amount needed to restore financial stability to Ireland might reach €120bn, the Taoiseach, Brian Cowen, said last night that the rescue package would provide less than ¤100bn. EU sources estimated that the final figure would be between €80bn and €90bn In addition, the UK has offered to make a direct bilateral loan to Ireland, expected to be in the "low billions".

Mr Cowen said: "The European authorities have agreed to our request. A formal process of negotiation will now commence that will lead to the provision of assistance."

He said the bailout application would address the budgetary challenges of the Irish economy. "A central element of the programme will also be to support further deep restructuring and the restoration of the long-term viability and financial health of the Irish banking system," Mr Cowen said.

Dominique Strauss-Kahn, managing director of the International Monetary Fund said "swift discussions"on an economic programme would now begin. It is unclear what the institutions will seek in exchange for their support. While Dublin has declared that Irish sovereignty will be stoutly defended, the assumption is that the IMF and others will have their hands on at least some of the levers of power.

The Irish authorities are tomorrow due to publish a four-year plan aimed at saving €15bn. Mr Cowen said: "It will be broken down into tax increases of €5bn and spending cuts of €10bn." Such cuts will, in the language of the government, be "front-loaded" in next month's budget, which will include cuts amounting to €6bn. The four-year plan will be revealed before agreement is reached on the rescue package: the hope is that the IMF will essentially endorse it. This would enable ministers to argue to voters – who have been deserting the government in droves – that the plan for the country, though inevitably harsh, has been fashioned by Irish hands rather than imposed by outsiders.

In this way Mr Cowen and his ministers will hope to salvage some element of national pride, which has been much battered by the fact that two years of intense effort by the government has not been able to stave off international intervention. While cutbacks have already been made, the country is braced for a particularly painful period, which all expect to last for years.

Ministers are adamant that the low rate of corporation tax, which is regarded as a cornerstone of Ireland's former prosperity, should not be altered. The tax has been a so-called "red line" during the negotiations, such has been its success at attracting droves of overseas companies to Ireland in recent years.

But Brian Lenihan, the Finance Minister, said the minimum wage, standing at €8.65 per hour, wouldhave to be looked at, since in recent years it had increased far beyond the rate of inflation.

He added that he did not anticipate that the entire bailout would be used up, saying the "bulk of the money" would be "a contingency fund which stands behind the banking system". It would provide a "powerful demonstration of firepower," he said. He added that there would have to be structural changes in the banking system.

The Fianna Fail party, which heads the government, is in deep political as well as economic trouble. Its difficulties are so deep in fact that on Saturday Mr Cowen spent the day in far-flung Donegal, campaigning in a by-election, rather than dealing with the economy.

An opposition spokesman said scornfully that Mr Cowen "thought he could hide out on an island, away from the anger of the Irish people".

His party is so low in the opinion polls, and its parliamentary majority is so wafer-thin, that he had resisted holding the contest until instructed to do so by a judge following a court case taken by Sinn Fein.

A local poll has placed Sinn Fein well ahead of the Fianna Fail party. The vote, which is to take place on Thursday of this week, could be the first of several such contests.

Fianna Fail, meanwhile, remains at rock-bottom in opinion polls throughout Ireland. Normally the largest party in the Irish Republic, the 17 per cent it recorded in an opinion poll this week represents a record low. This is a drop of one per cent, while the major opposition parties are unchanged or up slightly.

Almost all commentators say the party looks electorally doomed, since there is no obvious prospect of any positive developments on the horizon which might retrieve its fortunes.

With speculation rife that the minimum wage could be reduced along with cuts in social welfare benefits, senior union leader Jack O'Connor delivered a warning to "the elite". He said: "They want to restructure the social architecture of Ireland, which is already one of the most unequal countries in the world, to impose a new and more brutal form of tooth-and-claw capitalism. According to their gospel, the profligacy of the rich can only be redeemed through the crucifixion of the poor."