* Irish c.bank says deal with ECB not yet "done and dusted"
* Solution will be in the interests of eurosystem as a whole
* Irish PM says confident deal will be reached by March
By Padraic Halpin
DUBLIN, Jan 16 Ireland is working on a "novel"
solution to reach a deal with the European Central Bank on
rescheduling part of its bank debt, which will not take
policymakers too far out of their comfort zone, its central bank
Dublin has been negotiating with the ECB for over a year to
ease the tough repayment terms on promissory notes, or IOUs,
that it pumped mainly into the failed Anglo Irish Bank, and
wants a deal agreed before the next payment falls due in March.
Ireland's Prime Minister said on Wednesday that he was
confident a deal on the 31 billion euros ($41 billion) of debt
would be struck by then, meaning Dublin could avoid large
interest payments that come into effect from this year.
But central bank chief Patrick Honohan said later that
although considerable goodwill existed, a solution was not yet
"done and dusted".
"Taking into account both the statutory position and wider
policy stance of the ECB, an initiative of this type will be
novel and as such challenging," Honohan, who represents Ireland
on the ECB's board, told a parliamentary committee.
"We have been working carefully to build understanding and
confidence around a set of proposed transactions designed to
deliver for Ireland, while not taking other decision-makers too
far out of their comfort zone.
"The ECB is an organisation that seeks to proceed as far as
possible by consensus, and it is not surprising that this work
has been taking quite a while," he added. "In fact, what we have
designed is, I believe, largely in the interests of the
eurosystem (of euro zone central banks) as a whole."
Honohan did not give any details of the proposal.
Bailed-out Ireland is seeking to extend the duration of the
notes, annual repayments on which total 3.1 billion euros.
Avoiding a hefty interest charge this year would help reduce
Ireland's budget deficit by more than a percentage point,
according to finance department estimates.
The International Monetary Fund, which with the European
Union came to the country's aid in November 2010, has said a
deal is essential to ensure Ireland's smooth return to bond
markets when its bailout ends this year.
"PUT TO BED"
Anglo's collapse, seen as emblematic of the casino-style
lending practices that obliterated the local banking sector and
pushed Ireland into its bailout, is expected to cost the
equivalent of close to one-fifth of Ireland's annual output.
Honohan said exploiting the failed lender's "differences"
would allow Dublin to design a measure that would not leak into
other situations that were not comparable, thus soothing some
worries among policymakers.
Ireland avoided last year's 3.1 billion euro promissory note
cash payment, earmarked to repay emergency funding from the
country's central bank, by settling the bill with a 13-year
bond. Honohan said on Wednesday that Dublin was now looking at
something long term that would "put the issue to bed".
"This design will definitely be very advantageous to
Ireland, it will definitely allow a slower, better path to the
debt going forward," the central bank governor said.
"Of course any transaction that involves lengthening of
maturities, it can end up adding up lots more years of interest.
But if those interest rates are sufficiently low then that is
also advantageous, so don't worry on that count."
While the ECB talks were the central bank's primary
international priority, Honohan said resolving the problem of
mortgage arrears was "absolutely" the most important domestic
policy issue. More than one in six Irish home loans are not
being fully repaid.
He said there were risks to both customers and the state's
finances over how the country's mostly state-owned banks
ultimately deal with the problem but that the consequences of
not delivering would mean they would require more capital.
Honohan added that while the condition of the economy and
its banks still left much to be desired, and that unemployment
was "shockingly high" at close to 15 percent, things were moving
in the right direction, leaving the government well placed to
exit the bailout on schedule.
"The government's efforts to exit the (bailout) programme
are credible and we're backing them," he said.