John Redwood: Don't bail out Ireland – let it work out its money problems

The spending review of October added 8.6bn to this figure, by increasing capital spending above the June levels, and above the levels inherited from the previous government. If the Government now adds another 7bn of spending to assist Ireland, it means that it has added 15.6bn to spending and borrowing for the five years.

The Government needs to observe rigorous spending control in relation to the totals it published last June. The public will find it difficult to understand why certain items are being cut that matter to them, if at the same time the money being spent on EU contributions and euro support keeps soaring.

The argument for the Irish bailout comes from the EU, not from Ireland. Ireland has neither asked the EU nor the UK for a loan. The talks now under way are to persuade the Irish government that it needs to borrow more to deal with the "crisis" in the bond markets which foolish talk by some has created in recent days.

Two arguments are used. The first is that the Irish government will need to borrow more to sustain its own finances. Now that the markets say it will have to pay more than 8 per cent for 10-year money, the EU argues it needs to borrow some money at a lower rate from the rest of the EU/UK to avoid its interest bill getting too high.

It is also thought for some unknown reason that borrowing more from the EU will restore bond market confidence. They thought the same about Greece when Greece did apply for EU help, but there is little sign this theory proved correct in that case, as Greek bond yields have remained very high. Indeed, Greece still has to pay the markets more interest for each new euro borrowed than Ireland does.

The truth is each country has to reduce its own deficit in its own best way.

Ireland has been bravely trying various methods to do so, and is planning a new budget. Sensible people from the EU would encourage Ireland to produce a convincing new budget.

If Ireland wishes EU officials to work with it in private to ensure the new budget does the job, markets will be impressed by seeing the deficit figures coming down in a convincing way. That will lower rates.

The second is the argument that Ireland's banks need recapitalising, and the EU/UK should help do that. This is strange. The ECB, the EU regulators and the Irish authorities have been happy with the capital and cash arrangements of the Irish banks and have allowed them to carry on trading. If the Irish banks need extra liquidity that is the job of their Central Bank, the ECB, to supply it.

There is no need or hurry to run down the general special financial facilities that the ECB has made available for EU banks if that is going to cause new strains. If the regulators want the Irish banks to have more capital relative to their loan books, then they can work away in private with those banks. Some combination of selling off loans, selling other assets, cutting costs and selling companies and businesses from within the banking groups could cut the risks and raise the ratios.

It is the height of folly to encourage so much speculation about the state of these banks, and to suggest in public that the financing arrangements have to be changed. That is destabilising conduct of the kind that turned a serious problem into a crisis during the peak of the credit crunch.

If the authorities by public comment trigger withdrawal of too many deposits, the ECB simply has to supply more cash to meet the depositor demands, and then has to help with a more rapid run down of the banks' balance sheets than would otherwise be necessary.

Why do modern regulators want to do so much in public, in a way which can damage confidence in the institutions they are meant to be regulating?

The fact that RBS and other UK banks have substantial loan books in Ireland is no reason to force UK taxpayers into helping recapitalise Irish banks. The Irish loans of the UK banks will continue regardless, and doubtless they have already made provision against possible losses on this portfolio.

If they think they need to make further provision, then this will come off the profits they are making elsewhere and should be manageable.

I see no reason why EU governments should suddenly buy shares or inject capital into Irish banks. If the Irish state thinks it needs to inject more capital, then it has to provide that from within its own budgets.

When you are recovering from a serious bout of borrowing too much, borrowing more does not help. Ireland, like many western countries and banking systems, needs a work-out or earn-out, not a bailout.

If you are worried about "contagion", the possibility that other states may also be forced to pay more to borrow, the last thing you should do is to ask those other states to find more public money to bail out a weaker state. The more the stronger states have to borrow, the weaker they become in turn.

John Redwood is a Conservative MP and former Cabinet minister.