In These New Times

A new paradigm for a post-imperial world

A crisis we can’t afford to ignore

Posted by seumasach on November 16, 2010

RBS owns the Ulster Bank in Ireland and Lloyds offshoot HBOS went on a mad expansion spree in Ireland at the peak of the credit boom in 2005.

Now we can see why Cameron is so keen on an EU bailout of Ireland- with £143 bullion invested in Ireland, much of it directly into Ireland’s collapsing property market, it would be to a large extent a bailout of Britain’s banks. This is in any case inevitable given the collapse of our own economy and property market, but it would be a coup for the City if they could get the EU to cough up for a large chunk of it. The EU has yet to deal with the “British question”- the fact that they have left their western flank exposed to city of London financial operations. This could be an opportunity to do so. Interesting that after the rebuff of the Obama/Cameron offensive in Seoul, the focus turns immediately to the euro rather than to the infinitely more vulnerable pound and dollar.

Alex Brummer

Daily Mail

16th November, 2010

No one in Britain can look at the rapidly unfolding Irish financial crisis with any kind of calm because the UK and Irish banking systems – and the countries’ wider economies – are inextricably bound together.

Ireland is our biggest trading partner in Europe, and our two partly state-owned banks, the Royal Bank of Scotland and Lloyds, are among the biggest lenders to Irish firms and consumers.

Every time anyone makes a deposit in a British Post Office, they are in effect banking with the deeply damaged Bank of Ireland because it runs the banking arm of the Post Office.

And if the convulsions in the eurozone were to spread from Ireland to Portugal and Spain – as looks increasingly likely – it could be disastrous for British banks, which have also made enormous loans there.

Britain can, of course, be thankful that it is outside the euro currency area and has the freedom to set its own interest rates – which means it can allow the pound to fall in a bid to boost our exports.

Indeed, the government is partly counting on the 20 per cent or so decline in the pound over the past two years to shift the economy away from finance and toward manufacturing and exports.

But divorcing Britain from the travails of its neighbours on the Continent is not easy. The strong connections between our banking system and those of Spain and Ireland would suck us into any euroland crisis.

We must be thankful that the steps taken by the Coalition to deal with our own budget deficit and debt mountain mean our cost of borrowing on international markets is a modest 3 per cent for ten-year loans.

Ireland has made more ruthless cuts to the public sector, and in pay and pensions, but its borrowing costs have nevertheless ballooned to 8 per cent.

The reason for this is that the Dublin government has been hit with two once-in-a-century events, which have viciously turned market sentiment. Firstly, the Irish banks are disappearing beneath a mountain of bad debts, some £35billion of which are so rotten that they will never be recovered.

Foot on their throat: German Chancellor Angela Merkel wants Ireland to raise business tax as part of any bailoutFoot on their throat: German Chancellor Angela Merkel wants Ireland to raise business tax as part of any bailout

Secondly, Ireland has suffered a calamitous loss of corporate and personal tax revenues as a result of the recession.

In the decade leading up to the credit crunch, the Celtic Tiger was the favourite destination for American and Asian investment in Europe.

Several major UK companies, including the advertising giant WPP and the pharmaceutical group Shire, moved operations to Ireland.

However, Ireland’s low company tax rates have been a continuous source of irritation in Berlin. German Chancellor Angela Merkel is insisting that any bailout is linked to a promise from the Irish government to raise business taxes in line with those elsewhere in Europe.

One senior official working for the Irish authorities told me yesterday: ‘Merkel has her foot on our throat.’

Dublin believes it has enough money in the coffers to finance itself at least until February and withstand the crisis. But there is immense pressure on the finance minister Brian Lenihan to accept a bailout now. Even though the UK may have to contribute to an Irish rescue – with an overall estimated cost of £70billion – it could turn out to be a price worth paying.

At £143billion, UK banks have more exposure to an economic crisis or loan default across the Irish Sea than anyone else.

RBS owns the Ulster Bank in Ireland and Lloyds offshoot HBOS went on a mad expansion spree in Ireland at the peak of the credit boom in 2005.

The good news is that while the British government has much to fear from a calamity in Ireland, consumers look to be fairly well protected. The bigger Irish banks – the Bank of Ireland and Allied Irish – have fully recognised and supervised UK banking subsidiaries.

This means than depositors, either directly, or through Post Office accounts, are insured up to the value of £50,000. Above that level, the Irish deposit insurance scheme, which is more generous, should come into play.

Even if the Dublin government does accept that rescue is necessary to restore stability and bring the cost of borrowing back to manageable levels, one should not for the moment think that would be the end of the crisis.

Portugal, and possibly even the large economy of Spain, are also in the firing line – and that would herald an even worse calamity.




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