FACTBOX-Key political risks to watch in Ireland

DUBLIN Aug 2 (Reuters) - Ireland's early and sharp fiscal reforms have pointed the way for other heavily indebted euro zone members but its sluggish economic recovery and banking woes could hinder its deficit-cutting drive.

After the end of a decade-long property bubble triggered fiscal and banking crises -- battering Ireland's prized 'Celtic Tiger' economy in the process -- Dublin has hiked taxes, curbed spending and slashed public pay to halt a soaring deficit.

Below are some of the key political risks to watch:

BANK PLANS STILL OPEN TO MARKET TURMOIL

Both Irish participants Bank of Ireland (BKIR.I) and Allied Irish Banks (ALBK.I) passed the stress tests coordinated by the Committee of European Banking Supervisors (CEBS) last month and the country's central bank said neither needed additional capital beyond the requirements set earlier this year.

Ireland laid out what was billed as "once and for all" recapitalisation plans for its banks in March, telling them to find up to 32 billion euros by year-end to plug the hole left by risky loans moved to the National Asset Management Agency (NAMA), the "bad bank", and to meet new regulatory requirements.

Bank of Ireland, the country's largest bank by market value, has raised 3 billion euro of fresh capital, much of it from private sources. Rival Allied Irish Banks (ALBK.I) is in the process of selling some of its most profitable units and needs to launch a rights issue later this year.

Europe's main ratings agencies, which all stripped Ireland of its prized AAA rating in 2009, have broadly backed Dublin's banking strategy, with Fitch saying the potential 22 billion euros needed by nationalised Anglo Irish Bank [ANGIB.UL] would make little difference to the country's sovereign rating.

However voter anger increases with each billion pumped into Anglo Irish and state-controlled Irish Nationwide Building Society whose fates lie with the European Union. [ID:nWLB1639]

What to watch:

-- Progress on Allied Irish's capital raising. The head of its Polish unit Bank Zachodni WBK BZWB.WA said last week it had met with four potential buyers. Allied Irish should give further colour on this, the sale of its U.S. arm and a rights issue when it reports first-half results on Aug 4.

-- Any clarity on the future of Anglo or Irish Nationwide. Anglo's CEO told Reuters in an interview in June that he expected a preliminary European Union verdict by early August. [ID:nLDE65R1KR]

-- Dublin said it wants to gradually phase out its bank guarantee scheme after the European Commission extended it until the end of December, but banks need to show they can stand on their own feet. Bank of Ireland may indicate how close they are to doing so when reporting first-half results on Aug 11.

DEFICIT-CUTTING HURDLES

The cost of bailing out Anglo could push Ireland's budget deficit above 20 percent of GDP this year from 14 percent in 2009. Although Dublin is structuring the bank rescue in a way which allows it to spread the payments over 15 years and has said it is on track to cap this year's "underlying" deficit at the target of 11.6 percent of GDP, officials fear investors' perceptions could be skewed by a huge headline deficit figure.

Even when the banking damage to the deficit is done, some commentators have said Ireland will struggle to cut it to 3 percent of GDP by a European Union deadline of 2014.

Ireland exited the euro zone's longest-running recession in the first quarter and the government has built GDP growth of 4 percent from 2011 to 2014 into its fiscal plans. The IMF has said slower than forecast economic growth would see the deficit shrink to just 5.9 percent of GDP by the EU deadline. [ID:nLDE66D0F6]

Ireland, which faces no major bond redemptions this year, has covered its funding needs well into 2011 after raising almost all of its 20 billion euro bond issuance target for 2010 -- roughly the same amount the government collects in the two main taxes, income and value-added.

An economist who helped devise Ireland's austerity package said in June borrowing costs remained above sustainable levels and the country's debt agency chief John Corrigan said on July 16 that the spread of 10-year Irish bonds versus benchmark German Bunds was "disappointingly high."

What to watch:

- The premium investors demand to hold 10-year Irish government bonds rather than euro zone benchmark Bunds has narrowed to around 238 basis points from 300 bps when Corrigan made his comments. Officials will be keen for that momentum to continue leading up to the next monthly bond auction on Aug 17.

- Dublin will also watch how the markets react if any indication is given as to whether money promised to Anglo this year will be included in the 2010 deficit. Eurostat revised the 2009 figure to account for last year's bailouts this April.

- The government will also want to remain the euro zone's shining example of fiscal consolidation by pushing through 3 billion euros of savings in December's budget for 2011. Any indication of where the cuts might come will be monitored.

WILL THE GOVERNMENT, MINISTERS SEE OUT TERM

Analysts think voters are likely to see parliamentary elections before the 2012 due date and some say Ireland's coalition, which has to rely on support from independents, could fall at any time. [ID:nLDE6650V4]

Opinion polls show that Ireland's main opposition Fine Gael and Labour would comfortably win that election and while both have promised to meet the EU's deficit targets, it is not clear if they agree on a route to get there. [ID:nLDE66M14Z]

The greatest risk to Ireland's cabinet is Finance Minister Brian Lenihan's health after he said in January he would only carry out essential duties while undergoing therapy for cancer. He has said treatment was proceeding satisfactorily but policy continuity would be a concern were his condition to deteriorate since he is the main architect of fiscal reform.

What to watch:

-- Prime Minister Brian Cowen is under pressure to hold by-elections to fill three empty lower chamber seats and his thin majority would shrink to just three unless his Fianna Fail party snapped a 28-year trend of governing party by-election losses. How long can he put them off? Holding them this year would make December's budget vote even tighter than last year's.

-- Lenihan's health.

UNIONS/PROTESTS

Ireland's traditionally peaceful industrial relations gave way to unusually large protests last year against austerity measures. However, reaction to December's spending cuts has been limited and not caused major disruption to services.

The leader of Ireland's biggest union has said he wanted to avoid major industrial disruption because bond investors would take fright from a prolonged confrontation.

On June 15 public sector unions approved a pay deal struck with the government, which precludes further salary cuts and should also limit the risk of strikes.

What to watch:

-- With wage cuts off the table, Dublin will need to look hard for much of the 3 billion euros in savings needed in budget 2011. Lenihan has already signalled 1 billion euros to be cut in capital spending as well as limited scope to widen the tax base. Where will he cut and what will the reaction be?

For political risks to watch in other countries, please click on [ID:nEMEARISK]

(Reporting by Padraic Halpin)