UPDATE 2-Ireland expected to win ECB backing for bond deal
* ECB warm to Irish plan to restructure bank debt
* Irish ministers, central bank head propose plan
* Deal expected to be agreed in next week
DUBLIN/FRANKFURT, March 22 (Reuters) - Ireland expects to win support from the European Central Bank for its plan to avoid a 3.1 billion euro payment due next week on high interest loans put in place at the height of the financial crisis to prop up one of its failed banks.
The proposal, put ECB President Mario Draghi by Ireland's finance minister and its central bank governor, will see Ireland issue a 13-year bond to meet this year's 3.1 billion euro payment of so-called promissory notes used to bolster the former Anglo Irish Bank.
The bank would then buy the bonds issued by Dublin, either at a discount or full value, to replenish the Irish government's own finances and free up cash that could be used to ease an 8.3 billion euro, post-EU/IMF bailout funding cliff looming in January 2014.
An additional advantage is that the bank would be able to use the new bonds as collateral with which to borrow from the ECB at an ultra-low 1 percent, rather than having to use the more expensive Emergency Liquidity Assistance (ELA) loans they are currently using as funding.
"I understand the (central bank) governor will table the proposal outlined in principle by the (finance) minister yesterday, and let's hope the details can be concluded in Frankfurt today," Irish prime minister Enda Kenny told reporters on the sidelines of a conference.
Dublin has been negotiating with its international creditors - the European Central Bank, the European Commission and the International Monetary Fund - for months to replace a 30 billion euro payment to the former Anglo Irish Bank with another instrument, to lengthen the maturity and cut the interest rate.
While the ECB would welcome cutting the use of ELA in Ireland, it is wary about the deal been seen either as monetary financing or becoming a precedent for other euro zone countries.
One small potential crease that needs to be ironed out in Ireland's plan is that as long-term Irish bonds are subjected to a 5.5 percent haircut when used as collateral at the ECB, IBRC, as Anglo Irish is now known, could be left with a hole of roughly 200 million euros in its finances.
That would mean either small scale ELA being used again or Ireland finding the money from elsewhere.
"NOT A TEMPLATE"
Dublin hopes the deal will pave the way for the ECB giving its blessing to a wider deal to ease the debt burden of the promissory notes that would also see loss-making mortgages shifted from some of its banks.
A central bank source told Reuters the ECB wanted Ireland to make the upcoming payment at the end of the month, but added that it would be open to negotiate some sort of agreement on how it did it.
The ECB would, for example, favour Ireland refinancing the 30 billion euros worth of IOUs it pumped into Anglo for cheaper loans from the euro zone's rescue fund, the European Financial Stability Facility (EFSF), the source said.
The total coupon on the promissory notes is currently 8.2 percent, broadly equating to an interest bill of close to 17 billion euros, compared with an average rate of under four percent on EFSF borrowings.
Ireland's finance minister said that if an agreement is reached to side-step the end-March cash payment, it would not necessarily create a template for the overall solution.
"While what's happening at the end of the month is important, it's not the main game and the terms of it are not necessarily going to influence the design of what we're aiming for. In other words, it's not a template," Michael Noonan told Ireland's parliament.
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