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Britain ‘Knee Deep’ in Ireland After Bank Bailouts

Chancellor of the Exchequer George Osborne
U.K. Chancellor of the Exchequer George Osborne. Photographer: Daniel J. Groshong/Bloomberg

Chancellor of the Exchequer George Osborne says Britain “stands ready” to assist Ireland. What he didn’t say is that U.K. taxpayers have already funded the largest part of an 18.4 billion-pound ($29.4 billion) bailout for Irish lenders.

The aid was used to prop up the Irish units of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc since the onset of the credit crisis, according to data compiled by Bloomberg News.

RBS, Britain’s biggest government-controlled bank, had at least 11.9 billion pounds of Irish assets covered by the U.K. taxpayer-backed Asset Protection Scheme at the end of 2009. It also sent 2.71 billion-pounds of additional capital to its Ulster Bank unit up to January this year, according to records in Dublin’s Companies Registration Office. Government-controlled Lloyds sent a total of 4.45 billion euros ($6 billion) in fresh capital to its Bank of Scotland (Ireland) unit in 2010 and previously, the bank said.

“We’re knee deep already in Ireland’s banks,” said Peter Hahn, a former managing director of Citigroup Inc. who now lectures on corporate finance at Cass Business School in London. “It’s going to get increasingly disturbing for people to see how exposed we are to Ireland’s banks.” If anything, 18.4 billion pounds “sounds like a low number,” he said.

‘Good Neighbors’

British banks have the world’s biggest “exposure” to Ireland, totaling more than $222 billion at the end of the first quarter, according to the Bank for International Settlements. Bank bailouts have forced Britain to implement the biggest public expenditure cuts since the end of World War II.

London’s offer of help came “because we are good neighbors of Ireland, not because we have particular concern about any U.K. bank,” Osborne said before a European Union discussion on assistance for Dublin yesterday.

RBS, 83 percent government-owned, had a total of 53.3 billion pounds of loans in Ireland as of Sept. 30, while Lloyds, 41 percent government owned, had 26.68 billion pounds of Irish loans at June 30.

Both banks invested in the residential and commercial real estate markets before Ireland’s property bubble burst at the end of a decade-long boom.

Irish house prices have fallen 36 percent from their 2006 high, mortgage lender Irish Life & Permanent said in a report last month, while commercial property prices have dropped 59 percent since September 2007, according to an index from Investment Property Databank.

‘Very Connected’

Lloyds said loan losses at its Irish unit rose 52 percent to 1.6 billion pounds in the first half of the year, while RBS earlier this month said bad loans in Ireland “increased sharply.” Ulster Bank write-offs and pretax operating loss both doubled.

Lloyds said in August that Bank of Scotland (Ireland) would cease to operate as a separate unit and that the business would be transferred to its U.K.-based Bank of Scotland division. The bank was acquired as part of Lloyds’s HBOS takeover in January 2009.

British and Irish banks are “very connected,” Prime Minister David Cameron told a House of Commons committee in London today. The U.K. may provide loans directly to Ireland and these would be added to the budget deficit, he said. “We have an interest in not just the euro zone being a success, we have an interest in Ireland being a success.”

Budget Deficit

Ireland’s Finance Minister Brian Lenihan today said the government is prepared to ask for a rescue package for its banks after talks with the European Union and International Monetary Fund conclude. The loan may be worth “tens of billions” of euros, according to central bank Governor Patrick Honohan.

Britain is seeking to cut its budget deficit to 2 percent of GDP by 2015 from more than 10 percent today. As part of the process, ministers considered canceling a 5.25 billion-pound order for two 65,000-ton aircraft carriers, according to a letter from BAE Systems Plc to Cameron last month. The funds committed so far to assist banks in Ireland would buy seven vessels.

In October 2009, Britain’s Business Secretary Vince Cable, then Treasury spokesman for the opposition Liberal Democrats, said “many people will find it hard to understand why British taxpayers are bailing out bad investments made in Ireland.” Today he declined to comment.

RBS, Lloyds and U.K. Financial Investments, which manages the British government’s holdings in banks, declined to comment.

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