News Analysis - Ireland bailout: Ireland on the brink as UK exposures rocket

In November, the Irish government had to accept a huge bailout of over €80bn (£72bn) from the International Monetary Fund and European Union as its banking system faced a sustained funding crisis, the result of an indulgent and unsustainable property boom. In order to appease the markets, the Irish will undertake a round of €15bn of spending cuts over the next four years on top of €14.5bn of cuts made over the last two years. VAT will rise to 22% in 2013, while there will also be a reduction in tax breaks for pensioners and increasing numbers will become subject to income tax.

Betting on success
If the government's budget is passed in December then ‚Ǩ6.5bn of savings will be frontloaded. Some have described the Irish austerity plan as the 'last gamble', though embattled Prime Minister Brian Cowen insisted it was the best option for the country. Cowen will rely partly on economic growth of around 2.5% a year to succeed, though his party, Fianna Fáil, is set for an electoral wipe-out early in the new year. He does appear to have won one battle, though, by managing to keep Ireland's corporation tax at a controversially low 12.5% in the face of strong demands from other Eurozone members to raise it.

With Greece having already received assistance of €110bn, fears are now rising that the Irish banking crisis could spread to Portugal, Spain, Italy and even Belgium.

Lesley Hughes, chairman of Northern Ireland-based Hughes and Co, is monitoring the situation closely and thinks that the Irish will be hit, on top of increased taxes, by a further rise in insurance premiums. He told PB: "There is a lot of sympathy for what is happening in Ireland." However, Northern Ireland has its own issues, with the Stormont assembly yet to agree how to implement the required budget cuts called for by Westminister.

Downgrades
Meanwhile, the Dublin-based companies of RSA and Aviva Insurance Europe have significant investments in Irish government bonds: on 25 November, Standard & Poor's placed both on negative watch. The news came after Ireland itself was downgraded.

Grant Ellis, chairman at Broker Network, noted that there would not be any dramatic impact on the insurance market in the UK from the Irish crisis. He said that the main problems would be for companies registered in Dublin and UK banks exposed to Irish debt.

The fear here is that the bailout, already set to cost the UK around £7bn, might not be enough with other significant European countries in trouble. Despite the UK's huge budget deficit, it makes economic sense for the UK to help out Ireland, one of our largest trading partners, with which our bank exposure is £88bn. Portugal is expected to need a bailout soon but there has also been speculation that countries such as Belgium, Italy and Spain could need assistance as well. The importance of these countries is clear: UK bank exposure to Spain is £70bn and Italy £44bn.

There is increasing anger in Germany that its citizens are helping rectify the mistakes of others and growing appreciation that the country cannot afford to fund any more bailouts. As the Euro itself comes under threat, the next six months could see some sizeable shifts in policy that could have a significant impact on the UK, especially if we are required to further help other nations.