In the same week as the UK government approved a huge hike to university fees and announced the largest cuts to council budgets across the country, the chancellor of the exchequer, George Osbourne, published the terms for the £3.25bn loan to help rescue the Irish economy. Many UK voters see the loan to its beleaguered neighbour as another example of the government protecting business at the expense of the UK voter.
The fact that the UK government could make between £410m and £440m in profit and fees is not enough to help voters swallow the pill. In order to lend the money to Ireland the UK will have to borrow on the international markets. Treasury officials said that the Irish would be charged a rate of between 5.7 and 6.05%, which is significantly more than the 3% rate on money the UK borrows internationally. In addition, the loan is a sterling loan, so the Irish will be forced to bear the costs of any exchange-rate fluctuation. The loan to "a friend in need" will be divided into eight tranches over its seven-and-a-half-year term starting in September next year. In addition, the UK will lend Ireland another £3bn as part of the EU/IMF bailout, bringing its total loan to the beleaguered Irish economy to £7bn.
Osbourne explained that the Irish economy was extremely important to Britain as "Ireland is the fifth-largest market for British exporters, accounting for 5% of our total exports abroad... Every man, woman and child in Ireland spends on average £3,600 a year on British goods". However, there is still a view that the real reason this special loan has come about is because of British banks' exposure to the decimated Irish property market, particularly through its state-owned banks. Both Lloyds and Royal Bank of Scotland (RBS), through Bank of Scotland Ireland and Ulster Bank, were significant lenders to Irish property developers. They were both renowned for offering aggressive terms in order to win loan mandates. This resulted in heavy bad debts but also means that in order to recoup any future payments from developers it is imperative that the economy in Ireland recovers. RBS, which is over 80% owned by the UK government, is understood to have lent around £53bn to Irish mortgage holders and businesses, while Lloyds is understood to have leant over £21bn in Ireland and over half of its loans are already impaired.
MPs voted on the legislation, which includes a limit to the payout to Ireland to five years, last Wednesday. The Loans to Ireland Bill was rushed through the Commons in a single day in a process which is usually saved for emergency legislation. It now goes to the House of Lords for approval. Although Alan Johnson, the shadow chancellor voted in favour of the bill as Ireland is a "special case", he said the legislation had been drawn up "hastily".
The loans, which the Irish government has promised to repay in full, will be junior to the IMF loan but would have parity in seniority with other loans from the eurozone. Although the legislation includes a provision to increase the size of the loan, MPs would have to approve any future increase to the bailout. The bilateral loan will not increase the size of the UK fiscal deficit, which is expected to be 10% of GDP in 2011.
Despite this, the loan to Ireland, which has been estimated at a cost of over £250 per household, is a heavy burden for UK voters to bear when they are also facing a 10% cut in council budgets as well as a tripling of university fees. There have been significant protests following the announcement of university-fee increases as free education has been one of the bedrocks of British society for decades. The increase to as much as £9,000 a year from just over £3,000 is expected to make university education more difficult for poorer sections of society to attain. Both of these cuts come on top of already announced cuts to child-benefit payments to households earning over £40,000 a year.