UPDATE 1-Ireland gets initial promissory note bank deal
* Ireland to use 2025 bond to sidestep cash payment
* Irish fin min says deal not template for wider talks
* Bank of Ireland, NAMA involved in complex arrangement
DUBLIN, March 29 (Reuters) - Ireland will avoid a 3.1 billion euro payment to one of its failed banks, settling the bill by issuing a 13-year bond, the country's finance minister said on Thursday ahead of broader talks on easing the country's financing burden.
Dublin has been campaigning for months to soften the terms of its bank bailout, concentrating principally on replacing 30 billion euros of high-interest IOUs given mainly to the former Anglo Irish Bank with another instrument that would lengthen their maturity and cut their interest rate.
With those talks with Europe set to take months, the government has been scrambling to sidestep the end-March payment.
Michael Noonan said the complex solution, initially involving the former Anglo accepting the 2025 bond in lieu of the cash payment, could see the cash saved being used to ease the country over an 8.3 billion euro, post-EU/IMF bailout funding hurdle looming in January 2014.
"The (EU/IMF) programme funding that would otherwise have been used to make the promissory note (IOU) payment should potentially allow greater flexibility around when and at what level Ireland returns to the capital markets," Noonan told parliament.
Ireland must return to bond markets in the next 12 months to build up enough funds to exit its bailout next year and a deal on part of its state-owned bank debt would boost the sovereign's debt sustainability described by its central bank governor this week as not being in a comfortable situation.
Yields on Ireland's benchmark 2020 bond, which have more than halved since Ireland's cost of official funding was cut last summer, fell to 6.8 percent on Thursday, the lowest level in almost 18 months.
Noonan said the deal signalled that the European authorities no longer saw the promissory notes as set in stone though the wider talks on easing Ireland's fiscal burden, which could include using the euro zone's temporary rescue fund to refinance the notes in full, would likely take a different tack.
"I wouldn't see this as a template for a broader deal," Noonan said, adding that the imminent increase to the combined lending ceiling of Europe's bailout funds would help the broader talks he expected to be completed in the autumn.
He later told state broadcaster RTE that Ireland wanted a wider deal on refinancing the remaining 27 billion euros of IOUs to involve a longer bond than 13 years.
Following talks with European Central Bank (ECB) president Mario Draghi, Noonan announced the plan for changing the terms of the end-March payment last week.
He confirmed on Thursday that a 2025 bond would be used in a complex new arrangement involving both part state-owned Bank of Ireland and the country's state run National Asset Management Agency (NAMA).
Noonan said it was ultimately intended that the government bond will be financed for one year, on commercial terms, with Bank of Ireland which may in turn refinance the bond with the ECB.
However prior to approval needed from Bank of Ireland's shareholders, the financing of the bond will be a collateralised facility provided by NAMA to Anglo, or Irish Bank Resolution Corp (IBRC) as it now known as, on equivalent commercial terms.
The promissory notes are largely used to repay emergency funding from the country's central bank and IBRC said it had 42.2 billion euros of funding from central banks and monetary authorities at the end of December, representing 87 percent of its total funding.
Analysts said it was this large exposure that likely necessitated the widely encompassing arrangement.
"It seems that the ECB does not want to face Anglo directly, they want Anglo's exposure to either the Central Bank of Ireland or the ECB directly to be reduced as quickly as planned," said Owen Callan, a senior dealer at Danske Markets.
"They want someone else, a proper private sector bank, to step into the middle and reduce the overall exposure of the European System of Central Banks even if the end result is the same."
As well as changing the promissory notes' terms, Dublin wants to shift the burden of loss-making mortgages from some of its other banks and IBRC confirmed on Thursday that it was in talks to do so as Ireland's EU/IMF lenders work through a technical paper on the wider agreement.