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Dutch coalition teeters over cuts as EU pact struggles

MYT 3:55:00 PM

AMSTERDAM (Reuters) - The Dutch government teetered on the verge of collapse on Monday after an anti-EU party refused to back big deficit cuts, creating a new hurdle for euro zone leaders who are already struggling with a pact on overcoming the bloc's budget problems.

Prime Minister Mark Rutte's cabinet was due to meet at 0930 am (0730 GMT) to discuss whether it can push through budget cuts to meet EU targets after the political crisis broke at the weekend - and whether to offer its resignation.

The prospect of new elections pushed up borrowing costs for the Netherlands, traditionally one of the strongest euro zone economies, as the country was drawn into Europe's debt crisis and elections appeared almost inevitable.

New elections could be announced as early as Monday, and would most likely be timed for September or October, analysts said.

Rutte, whose centre-right coalition has been in power since October 2010, failed to agree at the weekend on how to cut 14 to 16 billion euros from the annual budget with Geert Wilders, who leads the far-right Freedom Party.

The failure after seven weeks of talks with Wilders, whose party has supported the coalition without being part of it, cast doubt on Dutch backing for future euro zone measures to tackle it debt crisis by cutting budget deficits.

To survive, the government must seek support for the cuts from opposition parties, or face the prospect that the Netherlands could follow France by losing its triple-A credit rating.

"Our competitiveness, credibility and triple-A status are at risk because Wilders has walked away. That is very costly. The interest rate on our state bonds can run up," former Dutch minister and current European Commissioner Neelie Kroes was quoted as saying in Dutch daily De Telegraaf.

Economists said the political crisis not only threatened the Netherlands but had a wider impact on the euro zone. "This represents a potential sizeable stumbling block to the already challenged fiscal compact," Rabobank said in a research note.

"A failure on the part of a core country (and one we judge as 'true core' at that) to adhere to compact's deficit limits will represent a powerful debasement of the treaty," it said, adding that it would be harder for Germany and other core members to sell the idea to voters that "bailouts are not a free lunch - they come with a policy straitjacket."

Yields on Dutch 10-year bonds government rose on Monday to around 73 basis points by 0745 GMT over their German equivalent, the euro zone benchmark, from 60 on Friday.

Governments of every EU state except Britain and the Czech Republic have signed up to the fiscal pact but each country needs to complete parliamentary ratification by the end of this year.

(Reporting by Sara Webb and Gilbert Kreijger; editing by David Stamp)

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