NICOSIA The International Monetary Fund and the European Commission backed Ireland's calls on Friday to lighten the cost of its bank bailout, a move they hope will bolster the island's borrowing prospects and help wean it off international support.
Debt-laden Ireland wants the terms tied to up to 31 billion euros of IOUs pumped into two failed banks eased, and for the euro zone's rescue fund, the European Stability Mechanism, to take over Dublin's stakes in other lenders.
At a meeting of finance ministers in Cyprus, Christine Lagarde, managing director of the International Monetary Fund, and Olli Rehn, the European Commissioner in charge of economic affairs, gave tacit backing for Dublin's debt demands.
With the possibility of Spain requiring euro zone aid, a likely request for assistance from Cyprus and uncertainty hanging over Greece's future, the euro zone wants to deliver proof that its crisis management has worked - at least in the case of Ireland.
"Ireland is being exemplary in delivering on the implementation of its program," she told journalists, saying the question of easing Ireland's debt burden was "important".
Earlier this week, the IMF said Ireland's international bailout hinges on it getting more European support, and recommended that the IOUs Ireland wants to refinance should be replaced by long-term government securities.
Rehn said that investors' growing confidence in Ireland was down to expectations of a change to its support program.
"This improved sentiment is in part due to the commitment made by the euro area to find a solution to improve sustainability of the ... Irish program," he said. "The quality of the end result is more important than the schedule."
Arriving in Nicosia after a whirlwind tour of European capitals, Irish Finance Minister Michael Noonan suggested the prospect of a direct recapitalization of Irish banks by the ESM was gaining support after a 100 billion euro recapitalization of Spanish banks was approved by EU leaders in July.
"I have spoken with my French, German and Italian colleagues and they are understanding of the position," he told reporters.
"An arrangement which would have the direct recapitalization of Spanish banks and applying that directly to Ireland is contingent on progress being made in Spain."
However, the ECB, worried that a move to lighten Ireland's debt burden would set a dangerous precedent, has signaled in the past that it would not accept slippage in the repayment schedule.
On Friday, Joerg Asmussen, a member of the bank's Executive Board that forms the nucleus of its policymaking, said that ECB, IMF and European Commission staff were in intense discussions with Irish officials to seek ways of enhancing the program.
"The talks are ongoing," he said. "We are under heavy time pressure."
Yields on Ireland's benchmark 2020 bond, reflecting its cost of borrowing, have tumbled since euro zone leaders committed to examine this issue in late June.
In July, Ireland sold new long-term government bonds for the first time since 2010, offering a rare glimmer of hope in the European debt crisis.
The country wants to reschedule the repayment of the IOUs, which it issued to prop up two banks, to lighten the burden of interest payments.
Ireland struck a deal earlier this year to avoid immediate payment of 3.1 billion euros due, settling the bill by issuing a 13-year bond. Dublin now wants a similar deal on refinancing the remaining 27 billion euros of the IOUs - or promissory notes.
The previous Irish government issued the notes to Anglo Irish Bank and home lender Irish Nationwide, now merged and known as the Irish Bank Resolution Corporation, to help them access emergency funds from the Irish central bank - part of the ECB's Eurosystem - to repay private bondholders.
This corporation is kept afloat with emergency loans - known as Emergency Liquidity Assistance - from the Irish central bank, an arrangement that requires ECB approval.
One possibility for Ireland could be to try to convince other euro zone countries members to allow it to tap the European Financial Stability Facility (EFSF), the euro zone's bailout fund, to reengineer the debt payments.