Ireland: the rescue is official


BBC business editor Robert Peston on Dublin's financial woes

There will be formal confirmation this evening from the Irish government that it is applying for rescue loans from the European Union and the International Monetary Fund.

Since the request won't be refused, this can be seen as a "high level" announcement that the rescue is happening, according to officials.

There is expected to be a statement from the finance ministers of the EU's member states welcoming Ireland's application for financial support.

The total value of these loans - or more properly of these lending facilities - is expected to be less than €100bn (£85bn), although the definitive amount won't be fixed for a few days, until a team of experts from the IMF, European Commission and European Central Bank has finished their evaluation of the "hole" in the finances of Ireland's big banks.

The lending facility for Ireland is expected to have a life of three or four years, long enough (in theory) for Ireland to restore the health of its banks and to reduce the deficit in its public finances from 12 per cent of GDP (excluding taxpayers' financial support for banks) to a target of 3 per cent.

It is hoped that would be long enough for Ireland to restore its reputation as a creditworthy nation among commercial lenders and investors.

The UK will contribute to the rescue package, even though - unlike Ireland - it is not a member of the eurozone. What is less clear is whether the UK will make a direct, bilateral loan to Ireland, or whether the UK's help will be via its position as a shareholder in the IMF and as a participant in the €60bn (£51bn) European Stability Mechanism.

The Chancellor, George Osborne, is considering the provision of a direct loan to Ireland, because the UK is not a member of the €440bn (£376bn) European Financial Stability Fund, which will make the biggest contribution to the rescue package, and because the UK and Irish economies are closely intertwined, both in terms of trade and in the role played by Irish banks in Northern Ireland.

The way was cleared for Ireland to make an application for help from the EU and IMF by a statement made by President Sarkozy of France that EU member states would not insist that the Irish government abandon its cherished low rate of corporate tax.

On Tuesday, the Irish government is expected to set out its updated deficit reduction plans.

However there is unlikely to be agreement for several more days on how the emergency loan of up to €100bn from the EU and IMF splits between financial support for Irish banks and a more general lending facility for the Irish government.

Even so, investors and banks are expected to be reassured by tonight's formal statements from the Irish government and the EU that rescue loans have been requested and are expected to be provided.

UPDATE 16:52 Although it has been inevitable for several days - and on its way for months - Ireland's decision to request financial help from the European Union and International Monetary Fund is momentous.

And the reason is that until two years ago, Ireland looked like Europe's greatest economic success story.

Over 20 years, it grew at rapid rates that are more typical of Asia's fast growing economies - until its GDP per head overtook that of the UK.

But much of the growth during the current millennium came from massive unsustainable borrowing on international markets by Ireland's banks. Those banks in turn pumped up a dangerous property bubble - which has now exploded - by lending far too much to developers and homeowners.

It will be some days before we know precisely how much of the rescue loan goes towards mending Ireland's fragile banks and how much is lent to the government - so that the government (whose grip on power is shaky) can be sure of filling the excessive gap between what it spends and dwindling tax revenues (till that gap is closed by massive spending cuts and tax rises over the next four years).

But, in the meantime, Ireland's admission that for now it cannot pay its way in the world proves - some would say beyond any reasonable doubt - that the Irish model of economic success is seriously flawed.

Update 21.40 The British contribution to the Irish bailout could be fairly substantial. As well as contibuting indirectly through the E60bn European Stability Mechanism and the IMF, the UK Treasury has tonight officially confirmed for the first time that it may provide a direct bilateral loan.

Sweden, like the UK, may also provide a bilateral loan.

The rationale for a direct British contibution to Ireland's rescue package is that the UK is a substantial purchaser of British exports and Irish banks play an important role in Nothern Ireland.

Also, Royal Bank of Scotland has £53bn of "credit exposure" to Irish borrowers. So the bigger the crisis in Ireland, the worse the losses on these loans - which would hurt British taxpayers both as owners of more than 80 per cent of RBS and as insurers of many of these loans through the Treasury's asset protection scheme.

In that sense, there is financial logic for the British government to participate in rescuing the Irish economy, to limit losses for British taxpayers. ‬‪

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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