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Tough talks lie ahead to reduce the bailout blow

The next government is headed for confrontation with Brussels after Fianna Fail was wiped out by voters in a backlash against the European-IMF austerity programme, a leading British newspaper is reporting today.

The 'Sunday Telegraph' is reporting that the unprecedented and historic defeat, Fianna Fail's worst result in 85 years, makes the Government the first eurozone administration to be punished by voters in the aftermath of the EU's debt crisis.

Voter turnout was exceptionally high at more than 70 per cent, indicating public anger at the Government and the EU and the feeling within Europe is that some arrangement must be reached to address that public anger.

Last November, Ireland was forced to accept an €85bn EU/IMF bailout to cover huge public debts run up to save Irish banks.

The bailout was designed to prevent financial contagion that threatened the existence of the euro, but according to forecasts, the cost of servicing Irish bank debt and the EU-IMF loans will consume 85 per cent of income tax revenue by 2012.

Outgoing Taoiseach Brian Cowen, who stood down last month rather than face voters, was also pressured into implementing an austerity programme of tax rises and spending cuts drawn up by the EU.

The cost of the EU-IMF bailout in extra taxes for an average family has been estimated at more than €4,500 a year.

Other measures included reductions to the minimum wage, unprecedented cuts to public services and 90,000 job losses in a country where unemployment is running at almost 14 per cent.

In Dublin, Fianna Fail won just 8 per cent of the vote in a decimation that called into question the future of previously unassailable politicians, such as Brian Lenihan, the Finance Minister.

Enda Kenny will start to form a government tomorrow once all seats in the Dail are filled, almost certainly with Labour, after full results under "Ireland's complicated PR system" come through, the Telegraph said.

At a summit of centre-right EU leaders in Helsinki on Friday, Mr Kenny will beg Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, for concessions ahead of an emergency Brussels summit on March 11 to restructure the eurozone.

But the two European leaders, the European Central Bank and the EU will not permit any substantial changes.

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Ms Merkel will tell Mr Kenny that if he wants to reduce the punitive 5.8 per cent interest rate charged on EU loans, Ireland will have to give up its low corporate tax rate, a measure regarded as vital to economic recovery.

The new leader will be warned that there is no question of forcing privately owned financial institutions to assume Ireland's billions in bank debts because the resulting market panic would spread to Germany and France, tearing the euro apart.

The European Commission bluntly declared that the terms of the EU-IMF bailout "must be applied" whatever the will of Ireland's people.