Britain's bill for Ireland's bailout

18 November 2010

As representatives from the IMF, the European Central Bank and the EU touched down in Dublin to discuss a financial aid package for Ireland, where there are currently more questions being raised than answered.

One of these is how much it will cost British taxpayers to bailout their neighbours. Figures around the £14 billion mark have been mooted but all we know for sure is that the UK will underwrite around 14% of the anticipated tens of billions that will be made available.

This is because the cash will be advanced from the European Stabilisation Fund (ESM), created earlier this year. Britain will be liable for billions because the ESM includes all 27 member states. The UK would also support any loans from the IMF.

Extra cash could come from the European Financial Stability Facility, the £374 billion fund created after the Greek crisis, which is funded by the 16 eurozone nations, with voluntary contributions from Sweden and Poland.

British businesses that are invested in Ireland will also be on the sharp end of the financial gloom. In the case of Royal Bank of Scotland, this will, in turn, rebound on UK taxpayers who own 84% of the bank.

It has around £53 billion of exposure to Irish home and business loans of which just over 40% is underwritten by British taxpayers. It also holds around €5 billion worth of Irish government debt, although analysts describe these debt levels as modest.

The IMF has warned that RBS could have to write-off problem debts of up to £4.3 billion if the Irish economy significantly worsens, a move which would directly costs the British taxpayer around £3 billion.

By Thursday afternoon, Irish finance chiefs still appeared to be at odds over whether they would accept an aid package.

Irish Central Bank Governor Patrick Honohan seemed to indicate it was all but a done deal while finance minister Brian Lenihan later said Ireland was not at the point of getting a substantial loan. Such indecision, hesitation and contradiction could easily compound the financial damage, not just to Ireland but to other European countries.

It is hoped that any domino effect can be headed off by containing Ireland's problems.

If Lenihan sticks to his guns then he could still enjoy a hefty UK bailout in the form of a direct loan. Chancellor George Osborne has made supportive noises about Ireland, saying that he had no particular concern about UK banks' exposure to the Irish market, but emphasised
that it was in Britain's interest to see a strong and stable Ireland.

"The UK banks have passed stress tests, the UK banking system is well capitalised," he told reporters in Brussels this week.

"Our engagement in this is because we are good neighbours of Ireland, not because we have particular concerns about any particular UK bank," he said.

Ireland's status as a 'good neighbour' is in no small part due to its importance as Britain's fifth largest trade partner, ahead of China and the BRIC countries. Its 4.5 million-strong population receives around 7% of British exports and accounts for just under 2% of our national income.

It is a crucial market for Northern Irish food producers and retailers including Marks & Spencer and Tesco. This week British food manufacturer Northern Foods said it had agreed to merge with Ireland's Greencore to corner the ready meals market.

Longer term, there are concerns about Ireland's unemployment rate. Currently twice as high as the UK at more than 13%, there are fears that things will get worse before they get better on the Emerald Isle.

Do you think it's right that UK taxpayers should have to bail out our neighbours? Are you worried that Ireland's problems will have a direct effect on Britain? Share your views in our forum.

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