THE GOVERNMENT IS likely to trade off EU demands for an increase in corporation tax for a new levy on all banks operating out of the country.

Diplomatic sources confirmed to the Irish Times that European forces are keen for a bank levy to be imposed on Ireland. This levy would result in an expansion in business taxes generally, meaning Ireland would not be forced to raise its contentious corporation tax rate – allowing the country to save face.

The proposal carries two potential benefits for the Irish situation according to EU partners: Firstly, a bank levy would help Ireland to pay off deficits; secondly, it would provoke banks to reduce in size and become more manageable.

Several European countries would appear to support the measure – French finance minister Christine Lagarde yesterday commented that it was “quite desirable that Ireland use the taxation lever to reduce its budget deficit”.

A senior German government source told the Irish Times:

It’s of no use to try and humiliate a partner: we need an Irish government that’s able to act or the whole thing is worthless. But we are negotiating and it’s all about the mix because [Ireland’s] income side is simply too weak.

Ireland will have to act swiftly. German Chancellor Angela Merkel has said that Ireland’s finances are “worrying” and has warned that Ireland needs to resolve the problem before German voters become resentful about shouldering the bailout of another eurozone partner within six months.

Meanwhile, the Irish Examiner reports that the IMF is reluctant to contribute to bailing out the banks, meaning the bulk of the €85 billion loan will come from Europe.

The IMF wants to see bondholders take the hit for bank losses – but Europe has already pumped billions into the Irish banking sector:

• €130billion has been lent to date by the ECB
• €380 billion has been lent by other EU member states (Notably: Britain, Germany, France, Spain and Belgium)

These loans amount to significant amounts of each country’s GDP: it breaks down as 1 per cent of Spain’s GDP, 2 per cent of France’s, over 4 per cent of Germany’s, 6.6 per cent of Britain’s and a massive 11.7 per cent of Belgium’s.

If these loans were to be written off, the possible contagion to other EU states could be devastating, particularly for weaker economies like Portugal.

It is thought that 60 percent of Ireland’s €85 billion bailout will go to the banks; most of that money will come from European Commission, ECB, eurozone countries, and from bi-lateral loans offered by Britain, Sweden and Denmark.

Norway has also said that it would consider any request for help from Ireland.