FIRST IRELAND, THEN NORTH KOREA... WHAT NEXT?

THE THREAT of all out war between North and South Korea fanned flames caused by another day of political upheaval in Ireland yesterday, sending markets tumbling.

As markets plunged for a third successive session, the EU and IMF last night agreed to extend €85bn in emergency loans to Ireland ahead of the publication of its four-year austerity plan today – a precondition for the financing – in a last-ditch desperate attempt to prevent the carnage spreading to Portugal and Spain.

The rescue package, the details of which are still being finalised, is expected to see the level of core tier one capital – a key indication of financial health – in the Irish banks ramped up to 12 per cent from eight per cent in a bid to bolster confidence in the financial system, and provide a bigger buffer against potential future losses.

Bank of Ireland and Allied Irish Bank will effectively be nationalised by the move, as the government injects the additional funds by buying new shares in them.

The rescue package means no significant lender in the Republic will now be free of state control, with Bank of Ireland, currently 36 per cent owned by the government, now set to be majority owned.

Investors, however, remain worried the bailout could be jeopardised by the uncertainty in government. A key vote on the austerity budget – a vital precondition of the rescue package – is far from guaranteed, with MPs threatening to vote it down on 7 December unless Prime Minister Brian Cowen falls on his sword.

Some economists yesterday said that even if Ireland can pass the necessary austerity measures it may not avoid defaulting further down the line.

Ben May of Capital Economics said that the toxic combination of spiralling debt and sluggish growth might mean that Ireland “may well find the benefits of the defaulting outweigh the costs”.

George Magnus, an economist at UBS, added: “The [bailout] doesn’t solve the problem of the solvency of the banking system or the need for Ireland to restructure its debt... It just kicks the can down the road in the same way as happened with Greece”.

As the IMF called for calm, tensions between North and South Korea boiled over, after Kim Jong Il rained dozens of shells onto a South Korean island, leaving two marines dead.

The bombardment, sparked by anger in the north over a disputed sea border, ranked amongst the worst clashes between the two sides since the Korean war almost 60 years ago.

Markets continued to tumble, with the Eurostoxx 50 dropping 1.5 per cent to 2,745, the Irish ISEQ 20 index losing two per cent to close at 432, the Portuguese PSI dropping 1.3 per cent to close at 7,623 and the FTSE 100 losing 1.75 per cent to close at 5,581.3. Meanwhile, Irish 10-year gilt yields jumped to 8.4 per cent, Portuguese 10-year gilt yields rose over 6.9 per cent and Spanish 10-year note yields topped 4.9 per cent. The euro dropped from 85.3p to 84p against sterling. A febrile day on global exchanges was exacerbated when the US Federal Reserve downgraded its growth forecasts, casting further doubt on the health of the world’s largest economy. The Dow Jones Industrial Average dropped 1.3 per cent to 11,036.31.