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Ireland’s government is now surrounded.

Its European Union partners want it to accept a substantial rescue loan from the EU and International Monetary Fund – which is likely to include some kind of participation from the UK.

The European Central Bank is urging such a rescue, so that some kind of confidence of commercial lenders can be restored in Ireland’s banks – which would help Ireland’s banks to begin to repay the £110bn odd they’ve borrowed in emergency liquidity from the ECB.

Ireland’s central bank governor, Patrick Honohan, has this morning said that such a loan, running to tens of billions of euros, is very likely to be accepted.

All of which means that Ireland’s taoiseach and finance minister no longer have any room for manoeuvre (some would argue).

Can you imagine circumstances in which the Irish government, whose grip on office is not seen as particularly firm, could go against the urgings and advice of those states and institutions that are the last defence for Ireland against the perception that it is bust?

As I and my colleague Stephanie Flanders have written many times over many months, Ireland has borrowed more than was remotely prudent – some 700% of GDP, when bank debt, state debt, household debt and corporate debt is aggregated.

If Ireland’s creditors, many of which have been pulling out their money from Ireland’s banks as fast as they can in recent months, are to be reassured that they don’t have to demand the rest back – with potentially devastating consequences both for Ireland and the financial integrity of the eurozone – the implicit financial support for Ireland of Germany, France, the UK and other states has to be turned into explicit support. And soon.

The Irish government is to hold a cabinet meeting to finalise its four-year-plan to cut its budget deficit.

The meeting will take place later on Sunday, with details published by Tuesday.

Meanwhile talks between Dublin and the European Union, the European Central Bank and the International Monetary Fund (IMF) are continuing.

The Republic is negotiating the terms of a bail-out worth tens of billions of pounds to shore up its public finances.

Two key areas will form the basis of the discussions, says BBC business correspondent Joe Lynam:

• The country’s precarious fiscal situation which has pushed the budget deficit to 32% of gross domestic product
• How best to prop up the country’s enfeebled banking sector which has been frozen out of international markets and all-but nationalised

‘Non-negotiable’ rate

Dublin’s four-year plan is expected to set out how it will reduce the deficit to below 3% by Tuesday at the latest.

Then, and only then, are the terms of any international bailout expected to be published, says our correspondent.

However, the Irish government has insisted it will not raise the country’s low corporation tax rate in return for a European Union-led bail-out.

Deputy Prime Minister Mary Coughlan said the 12.5% rate – much lower than the EU average – was “non-negotiable”.

Her comments come as speculation grows that France and Germany want Dublin to raise the tax in return for aid.

Meanwhile, Allied Irish Banks (AIB) said 13bn euros ($18bn; £11bn) of deposits had been withdrawn this year, mostly from businesses and institutions – implying that the bank does not face a run by ordinary depositors.

The figure represents 15% of the 84bn euros of customer accounts that the bank reported possessing at the end of last year.

Bank woes

Although the Irish government claims to be fully-funded until the middle of next year, it has provided a blanket guarantee to the Irish banks, some of whom are now finding it impossible to borrow money in the markets.

On Thursday, the Irish government admitted for the first time that it needed outside help.

Finance Minister Brian Lenihan said he felt “no sense of shame” over the country’s economic record, but that it now needed outside help.

Previously the government had said it did not need any financial support from the European Union and International Monetary Fund (IMF).

The Republic’s low corporation tax has been criticised by other EU nations, who argue that it gives the country too much of an advantage in attracting overseas investment.

They now argue that the Republic should not be allowed to solely rely on a bail-out, and that it should instead raise the tax rate to help boost government funds.

Source: http://www.bbc.co.uk/news/business-11801680