Ireland’s bid for financial aid yesterday prompted Prime Minister Brian Cowen to call elections after support for his government unraveled.

Cowen made the announcement late today hours after the Green Party said it would pull out of his coalition. He said the vote will come early next year after passage of a 2011 budget.

The euro fell and Irish bonds pared their advance after Moody’s Investors Service said a “ multi-notch” downgrade in Ireland’s Aa2 credit rating was “most likely” because the aid would increase the country’s debt burden.

A rescue package that Goldman Sachs Group Inc. estimates may total 95 billion euros ($130 billion) failed to damp speculation that Portugal and Spain would follow Ireland in tapping the fund set up by the European Union and International Monetary Fund after the Greece rescue.

“It probably won’t halt contagion,” said Sylvain Broyer, chief euro-region economist at Natixis in Frankfurt. “The sovereign crisis isn’t yet over. Ireland is in the middle of a difficult crisis.”

The aid, which Irish officials said as recently as Nov. 15 they didn’t need, marks the latest blow to an economy that more than doubled in the decade ending in 2006. The bursting of the real-estate bubble in 2008 plunged the country into a recession and brought its banks close to collapse. With Irish bond yields near a record high, policy makers are trying to keep the crisis from spreading.

Shrinking Banks

“Clearly because of the size of their loan books, the huge risks they took, they became a threat not only to the state but to the” entire euro region, Finance Minister Brian Lenihan told Dublin-based RTE radio in an interview today. “The banks will be downsized to the real needs of the Irish economy” to “Irish consumers and Irish businesses. That has to be the primary focus of Irish banks.”

The euro slid 0.4 percent to $1.3624 at 7:45 p.m. in London. The yield on Irish 10-year notes fell 5 basis points to 8.3 percent after falling as low as 8.11 percent.

The U.K. and Sweden may contribute bilateral loans, the EU said in a statement. Lenihan declined to say how big the package will be, saying that it will be less than 100 billion euros. Goldman Sachs Chief European Economist Erik Nielsen said yesterday the government needs 65 billion euros to fund itself for the next three years and 30 billion euros for the banks.

Talks will focus on the government’s deficit-cutting plans and restructuring the banking system, the EU said in a statement. The deficit will total about a third of gross domestic product this year, including injections to banks.

Holding Line on Taxes

Hewlett-Packard Co., based in Palo Alto, California, said it may reconsider its investment in Ireland should the country raise its 12.5 percent company tax rate as part of a deal to secure the EU-IMF aid.

“HP is very clear, if the tax rate increased we would be relooking at our investment in Ireland,” Lionel Alexander, head of Hewlett-Packard’s Irish operations said in an interview with Bloomberg Television. “One of the key reasons we came to Ireland was for the 12.5 percent tax rate, and we think that should stand as part of these negotiations.”

German government spokesman Steffen Seibert said in Berlin today that “tough” conditions should be applied to the aid and that an increase in the corporate tax should be considered.

Irish banks may get immediate capital injections, Matthew Elderfield, the country’s head of financial regulation, said in a speech today. The country’s two biggest lenders need at least 5 billion euros immediately, Ciaran Callaghan, an analyst with NCB Stockbrokers, wrote in a note to clients on Nov. 18.

Ireland nationalized Anglo Irish Bank Corp. in 2009 and is preparing to take a majority stake in Allied Irish Banks Plc, the second-largest bank.

Bigger Than Greece

The package for Ireland will total as much as 60 percent of gross domestic product, compared with 47 percent for Greece.

Cowen plans to announce the government’s four-year budget plan this week and said an agreement with the EU and the IMF will come “in the next few weeks.”

“The most important issue is the passing of this budget,” Cowen, 50, told reporters. After that “it’s my intention to seek a dissolution” of the government. When asked about speculation he planned to resign, Cowen said he wanted to continue leading his Fianna Fail party.

Parliamentary support for Cowen evaporated today after the Green Party, his junior coalition partners, called for a January election and said he “misled’’ voters over the past two weeks. Two independent lawmakers have also said they may not support the budget, which is scheduled for Dec. 7.

Initial Resistance

Irish officials initially resisted pressure from the EU to take any aid, saying they were fully funded until the middle of 2011. European leaders sought to head off contagion from Ireland and reduce pressure on the European Central Bank to prop up the country’s lenders by providing them with unlimited liquidity.

Cowen defended his reversal on the need for aid. “I don’t accept I’m the bogeyman,” he said. “Now circumstances have changed, we’ve changed our policies.”

The bailout follows two years of budget cuts that failed to restore market confidence as the cost of shoring up the financial industry soared.

Lenihan cancelled bond auctions for October and November and announced 6 billion euros of austerity measures for 2011 on Nov. 4 in a bid to restore investor confidence. Those efforts failed after German Chancellor Angela Merkel triggered an investor exodus by saying bondholders should foot some of the bill in any future bailout.

Risk Premium

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, fell to 523 basis points today. It widened to a record 652 basis points on Nov. 11, with the yield reaching a record 9.1 percent. In 2007, it cost Ireland less than Germany to borrow. Its 10-year spread then fell to as low as 77 basis points less than bunds. The ISEQ stock index has plunged 70 percent from its record in 2007.

Ireland will draw on the 750-billion-euro fund set up by the EU and IMF in May as part of the Greek bailout to protect the currency shared by 16 countries.

Yields on bonds of Spain and Portugal have jumped amid concern that fallout from Ireland would spread. The extra yield that investors demand to hold Portuguese 10-year bonds instead of German bunds climbed to a record 484 basis points on Nov. 11.

“Speculative actions against Portugal and Spain are not justified, though it can’t be excluded,” Luxembourg Prime Minister Jean-Claude Juncker said today on RTL Luxembourg radio.