John Charcol’s senior technical director says a bailout loan makes sense for the UK because Ireland is Britain’s fifth biggest trading partner, but that the government risks losing money if the loan is made in Euros.
“If Ireland has to pull out of the Euro to regain control of its flagging economy and Britain has loaned the money in Sterling, then we’re guaranteed to get that money back in Sterling,” says Boulger. “We may even make a profit on it.”
“But if they pull out of the Euro and we made the loan in Euros, then they could be paying us back in a devalued currency – that would be what would happen if they returned to Irish Punts.”
The government is expected to announce further details of the Irish bailout in the next few weeks once the International Monetary Fund has scrutinised and approved the terms of the deal.
As well as a direct loan to Ireland, the UK will also contribute to the IMF and European Financial Stabilisation Mechanism but those amounts will be a contingent liability if Ireland defaults on repayment.
The total amount UK will pay out to Ireland is still unconfirmed though the Chancellor was reported to say he expected the UK’s contribution to be around £7 billion.
A Treasury spokesman said: “Discussions about the exact details of the UK bilateral loan to Ireland are ongoing in Dublin and the government has not announced the denomination of the loan or the rate at which it will be paid as yet, though we expect the amount to be £3.25 billion or €3.8 billion.”
Boulger added: “It’s clearly in our interest to make sure Ireland doesn’t go under. For one thing they’re our biggest export partner but the UK banks have also lent to the Irish banks and government. They owe a substantial amount to both RBS and Lloyds – way in excess of what our government is proposing to lend them.”
He added that having accepted Britain would make the loan it was vital we get the best terms for UK taxpayers which means lending to Ireland in pounds.
“I personally find it very difficult to see how the Euro won’t change somehow – this latest crisis has demonstrated the fundamental flaws of the single currency,” said Boulger.
Speculation about the future of the Euro has been rife as first Greece then Ireland had to accept rescue packages as their economies failed to stabilise.
Rumours continue to dog Portugal and Spain with many fearing they may be next to need billions in bailout cash.
Part of the reason the UK has managed to retain more economic stability is because the pound means the Bank of England has the tools to adjust interest rates and quantitative easing to help boost the economy.
But countries in the Eurozone have their monetary policy controlled by the European Central Bank, meaning the same interest rates apply in Germany as in Spain and Ireland.
Boulger said: “While the loan to Ireland is technically lending money on an asset, the key question is whether we’ll get that asset back. Unless Ireland defaults on repayment, lending in pounds would ensure we do.”
