Sinn Fein profits from economic chaos as voters punish Irish PM

The political defeat was just part of a bad day for Taoiseach Brian Cowen and his Fianna Fail party, as Irish bonds also took a hammering on the international markets despite the promise of an 85 billion euro bail-out for the economy from the European Union, International Monetary Fund and the UK.

The former Celtic tiger's banks were hit with downgrades, including one to junk status, as uncertainty continued over whether Mr Cowen would be able to push through his austerity budget with a reduced majority of two.

The developments came on a bad day for besieged economies in the eurozone and their governments, with speculation that euro could be on the brink of collapse.

The Spanish government admitted that it would have to sell bonds twice again this year to avoid a bail-out and with its credit rating dropping, there was uncertainty whether it would be able to do this.

The Portuguese government again put out denials that it is secretly negotiating a bail-out with other European Union states.

In addition, European officials were forced to deny a German newspaper report that Portugal was under pressure from some of its eurozone partners to follow Ireland and seek a rescue in order to prevent contagion spreading to Spain.

Meanwhile, Italy was facing fines from the European Court because it was unable to pay for the clean-up of rubbish in its third biggest city, Naples.

The failure to comply with clean-up standards by Silvio Berlusconi's administration was seen as another result of the country running out of money.

There were reports earlier this week that Belgium, which has debt worth 100 per cent of its GDP, could also be in trouble, partly because its political situation is unstable because of ethnic divides between the Flemish and Walloons.

In Ireland, Mr Cowen saw his hold on power slip another notch, as his ruling Fianna Fail party lost a special election for a long-empty seat in parliament. The winner vowed to force Cowen from office before he can pass an emergency 2011 budget being demanded as part of the international rescue.

The New York-based Standard & Poor's credit ratings agency said it was lowering Anglo Irish Bank six notches to a junk-bond B grade.It also cut the ratings on Bank of Ireland one notch to BBB+, and downgraded both Allied Irish Banks and Irish Life & Permanent one notch to BBB.

It says Ireland "may be forced to reconsider its current supportive stance toward Anglo's unguaranteed debt".

In the north west county of Donegal, Sinn Fein candidate Pearse Doherty said his dominant performance in a six-candidate field showed that people want to elect a government that will force foreign banks, not Irish taxpayers, to bear the cost of Ireland's financial crisis.

Mr Doherty had successfully sued the government over its 17-month refusal to permit an election in Donegal, given Cowen's unpopularity and narrow hold on power.

The by-election provided an early opportunity for voters to take out their anger on new austerity measures which include VAT being hiked two per cent to 24 per cent, 6 billion of public sector cuts on top of 15 billion last year and the minimum wage being slashed as part of a four-year plan to get Ireland back on its feet.

Turnout was estimated to be 55 per cent, 10 per cent lower than the last election, but this was seen as a positive showing given poor weather conditions.

Mr Cowen again faced calls from his own party to resign on the back of the defeat and continued economic problems.

There were questions whether he could still survive as Fianna Fail leader up to an election in January, which he was forced to accept by his junior coalition partners, the Greens, as the price of support for the budget.

The UK taxpayer is thought to be lending up to 14 billion to Ireland through the EU package and as a bilateral deal.