Will Britain lend billions directly to Ireland?
The strength of George Osborne’s statement this morning on the way in to the Brussels crisis meeting was unexpected. The idea that Britain could make direct bilateral loans to Ireland would have been utterly unthinkable up until this week. It is now on the cards.
“We’re going to do what is in Britain’s national interest,” said the Chancellor.
“Ireland is our closest neighbour and it’s in Britain’s national interest that the Irish economy is successful and we have a stable banking system, so Britain stands ready to support Ireland in the steps that it needs to take to bring about that stability.”
No decision has been made, because ultimately the trigger would need to be pulled by Dublin to activate any help. That proces begins tomorrow,when the same IMF EU troika that is inspecting Greece, visits Dublin for a quick assessment of the Irish banking problem. But the UK Treasury is positioning itself as Dublin’s friend. It is taking its cues from Ireland, rather than the ECB-inspired efforts to force feed a rescue on the Emerald Isle.
Ball is in UK’s court
The Treasury say that the Chancellor said something similar in Seoul last week, but everyone seems to acknowledge, as I reported yesterday, that some of the balls are now in the UK’s court. The help that the UK might offer goes beyond the potential £7bn exposure under the EU’s European Financial Stability Mechanism. The eurozone’s major economies believe Britain must be a big contributor, because Britain’s banks are the most exposed to Ireland, though Germany is not far behind. George Osborne’s statement shows he does not disagree with that logic.
The EU Economy Commissioner Olli Rehn said today that: ” UK banks have a very significant exposure to Ireland. There is a very strong interconnection in the banking sector and the financial system of the two countries.”
Irish finance minister Brian Lenihan also said: “I know that they see Ireland as one of their best customers and the United Kingdom is anxious to help in every possible way, but I don’t want to pre-empt their right to make their own decision.”
UK exposure ‘by no means trivial’
It isn’t just the £85 bn exposure of RBS (owner of Ulster Bank) and Lloyds. Two of the Big Four banks in Northern Ireland are Irish. Mervyn King mentioned yeaterday, in a significant aside, that UK bank exposure to Ireland was “by no means trivial”.
Even considering bilateral loans is quite some can of worms to open. It may well be necessary. But as I said on Monday, where does it leave Ireland’s 12.5 per cent tax rate? How will it go down with the myriad of interest groups facing cuts in the UK? Is it not just a further backdoor bail-out of UK banks?
This is all highly hypothetical, as Ireland is yet to pull the trigger. But it’s all very much on the agenda.