Irish ministers face an embarrassing climbdown over the country's ultra-low 12.5 per cent corporation tax rate this weekend, and are almost certain to agree a hike as part of an £80bn-plus bailout.
Representatives of the International Monetary Fund (IMF) and the EU want to increase the levy to provide Ireland with stable levels of tax revenue in exchange for billions in aid to shore up the banks.
They hope to announce a financial rescue deal shortly after the government's four-year deficit reduction plan is released on Tuesday. Officials believe that this will calm the markets and prevent the crisis spreading to other struggling eurozone nations.
The French President, Nicolas Sarkozy, piled on the pressure over the tax rate yesterday, saying: "It's obvious that when confronted with a situation like this, there are two levers to use: spending and revenues. They have a greater margin for manoeuvre than others, their taxes being lower than others."
However, the tax has been a major part of the country's economic growth strategy, with FTSE groups such as advertising giant WPP, magazine publisher United Business Media and Shire Pharmaceuticals relocating their headquarters to Ireland.
A leading expert in restructuring international debt said: "The big battleground is tax. Knowing the IMF, there are certain things it will not budge on and that includes a proper tax rate. At the moment, it's marginal when the government starts to collect tax money."
Other governments have – privately, at least – long criticised the rate, which they argue is unsustainable and distorts the market for attracting corporations. But on Friday, Ireland's Deputy Prime Minister, Mary Coughlan, said that the rate was "non-negotiable".
Yet the hike is looking harder to avoid, the restructuring source said, noting that the situation resembles the Greek crisis earlier this year. "This is mainly political, rather than financial and has echoes of Greece – government denials that the country needs help, then agreeing to talk to them, and finally agreeing to the terms of a bail-out," he said. It has been reported that at least 30 negotiators from the EU, IMF and Ireland are round the table this weekend.
The British government is keeping a close eye on the situation as its economy has a high level of exposure to Ireland. Royal Bank of Scotland, for example, was owed £53bn according to the latest available data from June. Britain's Chancellor, George Osborne, has already declared that "it's in Britain's national interest that the Irish economy be successful and we have a stable banking system".
The UK is set to provide around £7bn towards the rescue deal, though a Treasury spokeswoman insisted yesterday that Ireland has not yet requested any aid. "There are a range of options and we are looking at all of these," she said.
Ireland's precarious situation was demonstrated by an interim management statement from Allied Irish Banks on Friday, which showed that it had suffered nearly £13bn in withdrawals since June.
AIB loaned heavily to the property sector during the boom years, but this has been one of the hardest hit areas of the economy since the onset of the credit crunch in 2007.
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