Oct. 5 (Bloomberg) -- Irish Prime Minister Brian Cowen secured the first of three crucial victories by persuading voters to back the European Union’s Lisbon Treaty. Now, he has to fix the country’s banks and cut government spending.

Voters supported the EU’s new governing accord by 67 percent to 33 percent on Oct. 2, reversing a rejection in a June 2008 referendum just a month after Cowen took over as premier.

“We return now to domestic challenges,” Cowen, 49, told reporters in Dublin. “What we’ve always being saying is confronting those challenges can best be done against the background of a ‘yes’ vote.”

Passing the treaty gives Cowen space to tackle an economic crisis that’s sent unemployment soaring, forced the government to pump billions of euros into banks and triggered protests in Dublin. His next step is to win approval in parliament for the new National Asset Management Agency to take over bank debt, and then slash spending in the budget slated for December.

“Lisbon was one of the big three,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin. “Now, the government can focus on NAMA and fiscal consolidation.”

The premium investors charge to hold Irish bonds soared earlier this year on concern Ireland may struggle to pay its bills as the deficit widened and banks needed state aid. The country also has lost its top credit rating at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

‘Unfavorable’

The ‘yes’ vote is “rating supportive” and “removed a lingering uncertainty that had clouded Irish creditworthiness,” Moody’s analyst Dietmar Hornung said in a note today. Ireland remains on a “negative” outlook at Moody’s as “debt dynamics will remain unfavorable for several years,” he said.

The difference in yield, or spread, between 10-year Irish debt and the German equivalent was little changed at 165 basis points today. It widened to 284 basis points in March and remains well above the average of 27 basis points over the last decade.

The benchmark ISEQ stock index rose 0.6 percent to 3,248.49 as of 2:05 p.m.

Cowen succeeded Bertie Ahern as prime minister in May 2008. A month later, Ireland voted down the EU treaty by 53.4 percent to 46.6 percent, amplifying other political and economic problems that emerged at the same time.

Bad Debts

As the once booming economy began to shrink, unemployment doubled and the government was forced to shore up the nation’s banks. Allied Irish Banks Plc and Bank of Ireland Plc, the two biggest lenders in the country, are facing surging bad debts as a decade-long real-estate boom ends.

Cowen and Finance Minister Brian Lenihan are proposing to spend 54 billion euros ($79 billion) buying property loans through the new asset agency.

While Cowen says such an agency would purge the financial system of toxic assets, restart lending and reignite the economy, he still has to win over his coalition partner, the Green Party. On Oct. 10, the Greens will vote on staying in government and backing the bad bank plan.

Then Cowen has to frame a budget to narrow a deficit set to widen to 12 percent of gross domestic product this year, four times the EU limit. In the nine months through September, the deficit more than doubled to 20.2 billion euros.

Cab drivers and social workers have staged blockades and marches in Dublin, while protesters last month attempted to storm a hotel where Cowen’s Fianna Fail party was meeting. Labor unions plan a nationwide day of protest on Nov. 6.

“We have three big tasks,” said Dick Roche, Ireland’s European affairs minister. “One down, two to go.”

To contact the reporter on this story: Fergal O’Brien in Dublin at fobrien@bloomberg.net; Simone Meier in Dublin at smeier@bloombert.net;

Last Updated: October 5, 2009 09:06 EDT