By Gilbert Kreijger and Thomas Escritt
THE HAGUE (Reuters) - The Dutch government will resign on Monday in a crisis over budget cuts, spelling the end of a coalition which has strongly backed a European Union fiscal treaty and lectured Greece on getting its finances in order.
Prime Minister Mark Rutte will write to parliament later in the day offering the resignation of his cabinet, which relies on the populist Freedom Party to pass legislation, two sources told Reuters, opening the way for almost inevitable new elections.
Political turmoil in what is traditionally one of the euro zone's most stable and prosperous members jolted financial markets, already worried that the Socialist frontrunner in French elections has promised to renegotiate the agreement to ensure fiscal stability if he wins the presidency next month.
The crisis marks an embarrassing setback for Dutch Finance Minister Jan Kees de Jager, who has taken a tough line with euro zone "budget sinners" such as Greece, saying it should be denied international aid unless it gets its fiscal house in order.
But De Jager promised to keep fighting to cut the deficit and dismissed comparisons with the region's sickest economies. "The Netherlands will retain its solid fiscal policy and will also show the market it will lower its deficit and also have a path of sustainable government finances," he told Reuters.
"There is no correlation whatsoever between the Netherlands and the countries of southern Europe. (Our) sovereign debt is in the region of 65 percent (of total economic output), which is way below the euro zone average," De Jager said.
Greece, by comparison, aims to cut its debts to 120 percent of gross domestic product by 2020 from a towering 160 percent.
The Dutch row erupted at the weekend when the anti-EU Freedom Party refused to agree with Rutte's centre-right coalition on how to cut 14 to 16 billion euros from the budget and get the Dutch deficit down to the EU target next year.
Earlier, a junior minister suggested new elections were nearly certain. "I assume it is inevitable," deputy foreign minister Ben Knapen told Dutch news program RTL Z.
"It is important that everyone who bears responsibility stays calms and makes sure we get an orderly budget. We do have big problems," Knapen said before he entered a cabinet meeting.
Elections cannot be held until July at the earliest and are unlikely until after the summer holidays - long after an April 30 deadline when the Netherlands and most other EU countries, must tell Brussels how they will cut their budget deficits.
European Commission President Jose Manuel Barroso made clear the Dutch had to meet their targets. "We fully expect that the Dutch authorities will find a solution that ensures the financial stability of the country and the wellbeing of its citizens," he told Reuters on a visit to Copenhagen.
"I am confident that a solution can be found."
The failure of Rutte, whose coalition has been in power since October 2010, to win agreement on cutting the deficit next year to the EU's ceiling of three percent of GDP drew withering comment in Brussels.
"First you have a big mouth towards budget offenders and then you yourself can't deliver, and instead have to have new elections only one-and-a-half years after the new government took office," said one Brussels-based diplomat.
The Netherlands has been close to Germany in calling for austerity across the euro zone, and in supporting the EU fiscal pact which must win ratification by the end of the year in the 25 EU countries whose governments signed up to the treaty.
With elections unlikely before September or October, Rutte may try to cobble together an agreement with opposition parties as a caretaker prime minister to meet the deadline at the end of this month.
Investors sold Dutch and peripheral euro zone bonds on Monday, driving yields on debt issued by struggling Spain above 6 percent. The premium investors demand to hold Dutch bonds rather than German benchmarks surged to its highest in three years.
The Dutch crisis flared at a time of wobbling support for the EU fiscal pact.
The Socialist frontrunner to win the French presidential election runoff next month, Francois Hollande, has promised to renegotiate the agreement. This has alarmed financial markets, which fear he could throw the EU's commitment to fiscal discipline into question, although his aides say he will not try to pick the treaty apart.
France has already lost its triple-A credit rating and the Netherlands may follow suit if it fails to make the budget cuts.
"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.
The cost of insuring Dutch debt against default rose to its highest since mid-December. Dutch five-year credit default swaps rose 9 basis points to 128 bps after the failure to agree on the budget with Wilders, whose party is outside the coalition.
(additional reporting by Sara Webb in Amsterdam, Mette Fraende in Copenhagen and Robert Bartunek in Brussels; editing by David Stamp and Elizabeth Piper)