STRANOLAR, Ireland (Reuters) - Ireland's government saw its parliamentary majority cut to two on Friday, as voters in one of the ruling party's heartlands punished it for seeking an EU/IMF bailout and instead backed nationalists Sinn Fein.
State broadcaster RTE said it had learned that the bailout expected to be finalised over the weekend would include loans at an average interest rate of between 6 and 7 percent, far more than most Irish citizens were expecting to pay.
The loss of a seat in the remote northwestern county of Donegal complicates the country's politics as the deeply unpopular government enters the final days of bailout talks.
In the last day of trading before the terms of the bailout are expected to be announced, the extra yield investors demand to hold Irish debt reached a record high of nearly 7 percentage points above German bunds.
The ruling Fianna Fail party's candidate lost a special election for a vacant seat in remote northern Donegal county to Sinn Fein, a nationalist left-wing party which has capitalised on popular anger over the economic crisis.
Sinn Fein's head Gerry Adams, best known internationally as a leader of the nationalist movement during decades of violence in British-ruled Northern Ireland, said the goal was to take power in Dublin and end IMF-imposed austerity measures.
"We didn't buy into the austerity. We're not for the savage cuts," he told reporters.
The main opposition Fine Gael and Labour parties are expected to form the next government, but Sinn Fein, which now has a fringe role, could emerge as an opposition force, a sign of how dramatically the country's politics are being upended.
A nationwide election will take place soon because Fianna Fail's junior coalition partners, the Greens, said this week they would pull out of government after the budget passes.
Sinn Fein's Pearse Doherty defeated the Fianna Fail candidate for the vacant seat by 39.9 percent to 21.3 percent among voters' first preferences. Last time, Fianna Fail won 51 percent in the area, a stronghold for generations.
Doherty told national broadcaster RTE voters had rejected bigger parties that all favoured swingeing cuts: "Sinn Fein has stood alone outside the consensus of Irish politics and the people of Donegal southwest have overwhelmingly endorsed that."
Out-of-work builder Tony Gillespie, 55, a long-time Fianna Fail voter, cast his ballot for Sinn Fein despite having "a problem with their past." He wanted to "register a vote against what's going on to get some of the cronies out that have been in there for the last number of years," he said.
The Irish public has followed the IMF negotiations closely, and there could be a fresh political backlash if the government is seen as accepting loans at too high an interest rate.
RTE said several sources had told it the average rate for the IMF, EU and European Central Bank loans would be 6.7 percent, although it said some sources had said 6.4. Either rate is more than Greece paid for a bailout earlier this year and far more than Ireland pays on its existing debt.
The money would be loaned over nine years and would raise Ireland's interest payments to 8.5 billion euros (7.2 billion pounds) a year, about 20 percent of state revenues, RTE said. It described the rate as "much higher than people were expecting."
The main opposition Fine Gael party, which has called for bondholders in bailed-out banks to bear more of the cost, said any rate over 6 percent would be unacceptable.
"If that is the rate, that is too high," Fine Gael spokesman Leo Varadkar told RTE. "It is higher than the IMF rate, it is higher than the Greeks are paying."
Cowen is expected to agree to an assistance package of about 85 billion euros from the IMF and the EU at the weekend, meant to prevent trouble spreading in the euro zone. Portugal is under pressure to follow Ireland and seek a bailout, and policy makers fear debt problems could also hit Spain.
Cowen needs to tackle the worst deficit in Europe as part of the condition of a bailout. A failure to get his 2011 budget passed next month would trigger the downfall of his government.
His majority now depends on two independent members of parliament who have signalled they may vote the budget down. Garret FitzGerald, a former leader of Fine Gael, said the opposition party would probably not allow the budget to fail.
The measures, including a cut in the minimum wage and higher income taxes, are needed to reassure the IMF and Europe, which have been propping up Irish banks and stand ready to fund the Irish state for years.
The bailout is expected to see the state pour billions of euros into Allied Irish Banks, Bank of Ireland, Anglo Irish Bank
and other lenders, on top of 46 billion euros already pledged, to reassure depositors.
The deal will see Dublin control its top three lenders, and according to a report in The Irish Times senior bondholders in the banks may also be compelled to pay some of the costs.
(Additional reporting and writing by Peter Graff and Carmel Crimmins in Dublin)