* Says government must not ease austerity drive
* Uncertainty over mortgage losses could impact sovereign
* Says deal on Anglo promissory notes would 'boost
(Adds byline, details on promissory notes, background)
By Conor Humphries and Stephen Mangan
DUBLIN, Jan 29 Ireland's central bank warned on
Tuesday that mortgage arrears and tough export markets had the
potential to throw the country's recovery off track.
An elusive deal with Ireland's international creditors on
restructuring bank debt would provide a confidence boost to a
country keen to emerge from an EU/IMF bailout, the central bank
added as it set out its latest economic forecasts.
Ireland's economy grew an estimated 0.7 percent in 2012, its
second year of growth after a 2007 property
crash.. But the central bank cut its 2013
forecast to 1.3 percent from 1.7 percent.
As a result the government cannot afford to ease its fiscal
adjustment program despite beating its 8.6 percent deficit
target last year, the central bank said.
Pressure on the government to ease its austerity drive has
increased in recent months as opinion polls show the
anti-austerity opposition growing in popularity.
"It would not be appropriate to use the buffer this provides
to ease back on the adjustment effort," the central bank report
Continuing to beat the targets, it added, would "serve to
reduce uncertainty and, through this channel, contribute to a
faster domestic recovery."
The weakening medium term outlook will increase the pressure
on the government to secure a deal on restructuring 30 billion
euros of promissory notes tied to the bailout of Anglo Irish
Bank. Last week the European Central Bank rejected Ireland's
proposal to convert the notes into long-term bonds to be taken
up by the central bank. That would amount to "monetary
financing" of the government, the ECB reasoned.
Asked if a deal on the promissory notes would boost the
economy, Frisell said: "Hard question if that will help boost
growth, I guess it would help boost confidence in the whole
He refused to comment on what Irish Central Bank governor
Patrick Honohan might offer as a replacement for the rejected
proposal, saying that work on a deal was ongoing.
Another threat to Ireland's return to the markets is posed
by the failure of the country's banks to adequately deal with
mortgage arrears, the central bank's chief economist Lars
Frisell told a briefing of journalists.
One in six home loans are not being fully repaid, as Ireland
recovers from one of the biggest property bubbles in Europe,
with peak to trough falls in average house prices of 50 percent.
While the banks should have enough capital to address any
writedowns, the uncertainty about the losses are damaging for
the sovereign, Frisell said.
"There's huge uncertainty about this, which may be a problem
for Ireland when exiting the program because the capital needs
are uncertain," Frisell said, adding that the bank's existing
capital should be sufficient.
"We had expected more progress on this than we have seen
over the last five years. It's absolutely clear that the central
bank is not happy," Frisell said.
(Reporting by Conor Humphries; Editing by Ruth Pitchford/Janet