DUBLIN (Reuters) - Ireland is betting it can borrow more cheaply in 2011 -- but the threat of political upheaval in the first half and poor prospects for cross-party backing for austerity plans mean the window for tapping investors is small and closing.
Faced with sky-high borrowing costs, Ireland has pulled its bond auctions for the rest of the year, hoping that a credible four-year plan for tackling its budget deficit, set to be published by the government next month, will bring yields down.
With enough money to keep the wheels of state turning until mid-2011 -- despite the collapse of its banks, a burst property bubble and rising borrowing costs -- Ireland also aimed to show jittery debt markets it did not face a Greek-style liquidity crisis and could handle the worst budget deficit in the EU.
But it may well find itself trapped in a pincer movement of its own making.
Prime Minister Brian Cowen's already slim parliamentary majority will likely be all but wiped out when by-elections for three vacant seats are held before the end of April, and analysts expect this to trigger a snap election that will kick him out of power.
An election would be unlikely to produce an outright winner and could leave Ireland rudderless or embroiled in political wrangling for at least 6 to 8 weeks, the usual length of time between the calling of an election and formation of a government.
"The political risk in Ireland is well understood but the question is whether there's a tipping point, and the by-elections are clearly a source of concern for the market," said Harvinder Sian, interest rate strategist at RBS in London.
The four-year plan, the first year of which will be passed as the 2011 budget in December, will outline how Dublin will tackle a debt pile set to hit 155 billion euros this year, equating to about 100,000 euros per household.
All the major political parties support the need to get the deficit below an EU limit of 3 percent of Gross Domestic Product by 2014, but divisions lie in how to get there.
Prime Minister Brian Cowen this week invited the leaders of the main opposition parties to talks on a possible deal on how to tackle the shortfall. But a cross-party agreement, which would reassure investors, looks unlikely.
The leader of the leftist Labour Party, Eamon Gilmore, dismissed the idea as a "phoney consensus" and called instead for a snap parliamentary election.
Analysts said doing a deal with Cowen would curb opposition parties' own policy options and give the embattled prime minister a boost.
"While you can see the arguments on one side to have a national (unity) government, the political motivations for the opposition parties just aren't there," said Theresa Reidy, a political science lecturer at University College Cork.
Enda Kenny, leader of the Fine Gael opposition party, last week rejected a call by Irish telecoms and media entrepreneur Denis O'Brien for a "united front", and said he would not replicate the "Tallaght Strategy" of 1987 when his party backed Fianna Fail's policies to reduce a high deficit.
"While it was wonderful from a national perspective to support the Tallaght strategy, Fine Gael had no power or influence over it, and suffered at the polls," Kenny said.
Kenny is determined to lead a new coalition government but his own unpopularity continues to weigh on Fine Gael's performance and the party will have to fight to ensure it will be the senior partner in a new administration.
Labour, Fine Gael's favoured government partner and traditionally in third place, topped the most recent Irish Times/Ipsos MRBI opinion poll with 33 percent support.
A new government with Labour as lead partner is likely to find it unpalatable to get unpopular spending cuts through because of strong ties to trade unions and a preference for taxing the rich, introducing an uncertainty markets won't like.
Ireland currently has to pay nearly three times as much interest as Germany to borrow on financial markets, reflecting worries over a bill of up to 50 billion euros to clean up its banks and the impact on a budget deficit already well above EU limits.
Analysts said any suggestion of broad backing for the four-year plan, and the passage of the budget in December, will be a boon for borrowing costs -- at least temporarily.
"If we do get some consensus building, I think it lowers the risk," said RBS's Sian.
"The degree to which it's essential is related to just how quickly they can get the bond issuance done next year. If the issuance is completed rather quickly I think you could then start to see more stability in the market."
The NTMA debt agency said in August, before the latest bank bailout, that it already had borrowing of 6.5 billion euros in place for next year, leaving it to find 18.5 billion euros, which equates to over 4,000 euros per head of population.
"I think the NTMA will try and get in early in 2011 before the by-elections and perhaps do a syndicated bond in January," said Alan McQuaid, chief economist with Bloxham Stockbrokers.
"They will try and strike early." (Additional reporting by Carmel Crimmins, Editing by Sonya Hepinstall)