A sneaky British bank bailout?
After a week of denials, the Irish government is now in the process of requesting financial support from the EU, International Monetary Fund (IMF) and others.
In addition to the UK contributions to the IMF support, it is being reported that we are offering an additional direct loan to the Irish Republic.
Early estimates of the total UK contribution to this package of measures suggests funding of around £7bn.
Commentators have already started to question whether such a large amount of money from the UK to Ireland is really in the best interests of the British economy.
FT Alphaville has highlighted two very good reasons why it might make sense for the UK to support the Irish bailout.
By supporting the Irish government and their banking system, we might be preventing some British banks from suffering financial pain. Both Lloyds Banking Group and RBS appear to have significant exposure to Irish loans.
In the case of Lloyds, around 44% of their ‘Irish book’ of £26.7bn consists of impaired loans. RBS also has significant exposure to Ireland, through their Ulster Bank division, with a total book of over £50bn.
On this basis, any financial support from the UK could be viewed as an indirect method of providing additional capital to British banks. If the Government was to do this directly, it is unlikely public support for the measure would be in great supply.
The political argument for the financial support, also highlighted by FT Alphaville, is the value of our trading relations with Ireland.
Ireland is our largest trading partner, with 16% of all Irish exports purchased by Britain. This was worth €13.5 billion to the Irish economy last year.
According to the British Embassy in Dublin, every man, woman and child in Ireland spends an average of £3,607 per year on British goods, one of the highest per capita spends on British products in the world.
On this basis, it makes real sense for the UK to join the list of nations providing financial support to prevent a total collapse of the Irish economy.
It will be interesting to see how the UK Government manages to ‘spin’ this issue in the coming days and weeks, and also how their political enemies attack the support.
It will also be interesting to find out if these packages of financial support are enough to get Ireland out of trouble and, perhaps more importantly, prevent the spread of ‘contagion’ to the likes of Portugal or Italy.
Photo credit: ralpe/Flickr