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• Bailout appears inevitable as IMF prepares to consult Irish
• Osborne: 'It's in our interest Irish banking system is stable'
George Osborne's willingness to use taxpayers' money to support any international bailout of Ireland drew fire from eurosceptic MPs today as speculation mounted that an aid package would be assembled for the indebted nation within days.
With a high-level delegation from the International Monetary Fund (IMF), the European Union and the European Central Bank beginning their urgent assessment of the situation in Dublin tomorrow, the chancellor said the UK was ready to stand behind Ireland "because we are good neighbours".
Stock markets, unsettled in recent days, stabilised today despite continued uncertainty about the size and timescale of any deal. However, Ireland's borrowing costs remained at unsustainably high levels.
"Ireland is our closest neighbour – the only country with which we share a land border – it is in our interest their banking system is stable. Britain stands ready to support Ireland to bring stability," Osborne told reporters as he attended a Brussels meeting of finance ministers from the 27 EU nations.
Ireland's decision to allow the IMF and European bodies to conduct a "short, focused consultation" fuelled expectations that the country would reluctantly accept financial assistance to prop up an economy crippled by a €50bn (£42bn) bailout of its banking sector.
The cost of rescuing Ireland's banks is expected to rise amid expectations that Allied Irish Bank will reveal as soon as tomorrow the extent of its losses and admit the extent of the damage caused by withdrawals from savers and big companies concerned about the health of the Irish economy.
Brian Lenihan, the Irish finance minister – who insists that the country has not yet asked for any international funds – appeared to concede for the first time that he might need to do so.
"Despite a large range of measures adopted by the government, Ireland is a small country and, if the banking problems in the country are too big for this small country to manage, Europe is making it clear that they will help and help in every possible way to secure the system because we are part of the euro system," Lenihan told Irish radio.
The EU authorities are determined to prevent anxiety about Ireland spilling across the eurozone, which has been fraught with difficulties since Greece was forced to accept €110bn of aid in April.
One key indicator of contagion will be Portugal's cost of borrowing, which rose todayin an auction of 12-month treasury bonds.
Lenihan and the taoiseach, Brian Cowen, are likely to try to position any financial assistance as a bailout of the troubled banks – which survive day-to-day with billions of funds from the European Central Bank – rather than the country in an attempt to dampen the political fallout. Olli Rehn, the European commissioner for economic and monetary affairs, said that while it was "premature" to discuss any package, it would focus on a "reorganisation" of Irish banks. But any money provided would need to be made through the Irish state, and not directly with the banks, he said.
Osborne, who refused to admit whether any UK funds would be in the form of a direct loan or through an existing €60bn emergency Europe-wide mechanism, will also need to tread carefully.
The eurosceptic Conservative MP Bill Cash told the City minister, Mark Hoban, during the emergency questions in the House of Commons today that he should avoid contributing to any eurozone schemes. Another Conservative MP, Harriett Baldwin, told Hoban: "We cannot resolve the problems of the euro."
Significantly, Hoban was careful not to lay the blame on overspending or bad management by the Irish government, or Ireland's adoption of the single currency, instead saying: "This is a crisis that flows from the banking sector."
Osborne was also insistent that any assistance for Ireland was not based on concerns about UK banks' exposure to Ireland. The state-backed Royal Bank of Scotland alone has loans of more than £50bn to Irish companies and also owns Ulster Bank. "Our engagement is because we are good neighbours, not because we have particular concerns about any particular UK bank. The Bank of England or FSA have not expressed concerns about any UK bank," Osborne said.
In the markets, which have forced Ireland's cost of borrowing up to a painful 9% in recent days, bond investors kept up the pressure, forcing up bond yields slightly.
Jim Reid, global credit analyst at Deutsche Bank, said: "The markets are currently saying there will be a resolution in the next few days but any kind of creeping belief that a deal is proving difficult to orchestrate will see spreads widen again."
Jim Leaviss, head of fixed income at M&G, said he was concerned that Ireland would lose whichever way it turned. "Ireland's economy is depressed and tax revenues haven't held up. A tough deal imposed by the EU, particularly one that raised corporate taxes, would persuade companies to leave, depressing tax revenues further."
Osborne, though, tried to distance himself from expectations that a condition of an assistance package would be a requirement that Ireland raise its 12.5% corporate tax rate – the lowest of any major eurozone country. "It's up to countries to decide their own tax policies," he said.
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