THE next government's hopes of easing the €85bn bailout burden were dashed last night when German Chancellor Angela Merkel virtually ruled out lowering the crippling interest rate.
It came as negotiators from his party and Labour remained locked in talks to form a coalition.
The prospective partners are being further hampered by gloomy new figures, which reveal the State's finances are in worse shape than expected.
The last Government had hoped the new Universal Social Charge would boost revenue to the Exchequer. But while the gap between income and outgoings narrowed slightly in the first two months, it was not enough to meet official targets, the Exchequer returns figures reveal.
Despite our deepening economic woes, German Chancellor Angela Merkel indicated we would get no special treatment.
Speaking at a joint press briefing with Portuguese Prime Minister Jose Socrates in Berlin yesterday, she insisted that it was not possible to "artificially lower" the interest rates charged to the Irish State on its €85bn bailout deal.
"We can't get to a point where Ireland pays lower interest rates than Portugal," she said.
Her uncompromising message yesterday was that Ireland and Greece had "tapped an aid programme" and agreed to conditions that they must fulfil.
"If the Irish government now has a problem with interest rates, our job is to figure out what we can do -- or whether we can do anything," she added.
Mr Kenny had been expected to raise the issue of the interest rate at a meeting with Ms Merkel and other European People's Party leaders in Finland tomorrow.
But he now faces an uphill task after a spokesperson for Ms Merkel confirmed that she would not be having a separate one-to-one meeting with Mr Kenny like she did during the election campaign.
Fine Gael and Labour negotiators continued talks yesterday on the policies and complexion of the next government. Mr Gilmore and Mr Kenny met for 20 minutes yesterday morning to discuss the progress of the talks.
The key items on their agenda remain the differences between them on reducing the budget deficit (€7bn reduction target for Labour, €9bn reduction target for Fine Gael) and the length of time required to do so (2016 for Labour, 2014 for Fine Gael). The parties' negotiators were also briefed by the National Treasury Management Agency, which is managing the State's €94bn debt.
The country spent €1.95bn more than it took in during the first two months of the year as the State raised less money than had been expected from individuals and companies.
Fine Gael and Labour have until this weekend to agree on the policies of the new government, so that the programme can be put to a conference of all Labour Party delegates.
Fine Gael last night insisted Ms Merkel's comments did not mean that all chances of renegotiating the interest rate on the bailout loans were dead.
"Our interpretation is that she's not ruling it out," a spokesman said.
Labour TD Tommy Broughan broke the silence on the inter-party talks yesterday by saying that being in charge of the Department of Finance was an "absolute sine qua non" (indispensable condition) for his party.
"Unless Labour had a very driving position in the government -- that is control of the Department of Finance -- we would be better off leading the opposition," he said.