UPDATE 2-Retail slump, bank losses keep Ireland under pressure
* Banking, retail woes temper bond success
* Allied Irish narrows loss to 1.1 bln eur from 2.6 bln yr ago
* Retail sales down 5.5 pct, largest y/y fall since 2009
* Economists say weakness in UK, euro zone biggest threat
DUBLIN, July 27 (Reuters) - Dire retail sales figures and another big loss at state-owned Allied Irish Banks highlighted the difficulties Ireland still faces despite selling new long-term government bonds for the first time since 2010.
Ireland took a major step towards exiting its EU/IMF bailout on Thursday and sparked a rare glimmer of hope in the euro zone debt crisis when it raised 4.2 billion euros of debt and switched 1 billion euros of bonds maturing over the next two years to longer-dated issues.
The move further cut hefty borrowing needs that threaten to leave Ireland needing extra aid in 2014.
But the country still faces the tough task of reducing the largest budget deficit in Europe and repairing a banking sector whose bailout cost the equivalent of 40 percent of the country's annual economic output.
Having set the state back 20 billion euros, the most handed out to any lender still open, Allied Irish is in the process of closing nearly a quarter of its branches, axing 2,500 jobs - almost 20 percent of its workforce - and cutting salaries by up to 15 percent in a bid to return to profitability by 2014.
The bank announced a loss of 1.1 billion euros for the six months to June on Friday, the legacy of a property crash that led to its effective nationalisation last year, and also said mortgage arrears continued to climb in a domestic economy that is struggling to catch up with a robust export sector.
Demonstrating the pressures austerity-hit consumers face, official figures showed retail sales volumes tumbled 5.5 percent in June, their largest annual drop since 2009, as falling car sales dragged down the headline figure.
Economists said it was no surprise that the Irish consumer and the country's almost wholly state-owned banking sector remained under pressure, but that the deepening economic slump among Ireland's trading partners caused the most concern.
"The news that we don't have a properly functioning credit system, that the consumer sector is weak, isn't actually news. Everyone has that built into what are subdued forecasts," said Eoin Fahy, economist at Kleinwort Benson Investors.
"It's the export sector and the pronounced weakness of the UK and the euro zone that's the real news and it's worrying."
ARREARS ON THE RISE
After narrowing its loss for the first half from 2.6 billion euros a year ago, Allied Irish said it was still in line to make a profit in two years' time, announcing that it would hike mortgage rates and remove the expensive state guarantee from its UK deposits to help it get there.
Chief financial officer Paul Stanley told Reuters in an interview that the bank needed to focus on reducing its funding cost base and the cost base itself. "That's the trajectory that will move us back to a sustainable level."
He added: "We're re-pricing the asset base to an economic level, we're continuing to focus on getting the cost of funds down, particularly in the deposit area, and they are all quite big dial-turners."
Allied Irish, which also narrowed its provisions by 70 percent to 0.9 billion euros, said its deposit base increased by 3 billion euros for the six months to end-June and that it had met 70 percent of a 20.5 billion euros deleveraging target set under the terms of Ireland's bailout.
However the bank's loan book remained under pressure from rising mortgage arrears resulting from the protracted property crash and high unemployment, and government austerity measures that still have at least three more years to run.
Its proportion of Irish owner-occupier loans in arrears for more than 90 days rose to 12.9 percent, higher than the sector average of 10.2 percent at the end of March and Stanley said arrears were now unlikely to peak until mid-2013, rather than the earlier timeframe seen in March.
Arrears on buy-to-let loans, the most distressed segment of mortgage books across the sector, rose to 37.2 percent from 31.4 percent six months ago.
The bank's shares, which no longer trade on Ireland's main stock exchange, were flat at 0.05 euros at 1240 GMT.