* Banking debt switch boosts Ireland's funding credentials
* Launch of new 10-year bond seen as next test for debt agency
By William James and Emelia Sithole-Matarise
LONDON, Feb 8 (Reuters) - Ireland appears to have delivered a big new "buy" signal to investors with Thursday's landmark plan to ease the burden of paying for its busted banking sector.
Investors see it helping Ireland sell new debt this year, regain its funding independence and emerge as the first success story from the euro zone's sovereign debt crisis.
All of which should feed into a fresh rally for paper that has already been doing well.
The Irish government struck a long-awaited deal with the European Central Bank to switch a costly promissory note, used to pay for the rescue of failed Anglo Irish Bank, into less expensive sovereign debt.
By switching to lower interest rate bonds and stretching out the burden of repayments over four decades Ireland has saved itself 20 billion euros ($26.78 billion) over the next decade and freed up 1 billion euros for forthcoming budgets.
"The fiscal and financial situation of the Irish government has improved quite significantly after the agreement," said BNP Paribas rate strategist Patrick Jacq. "Clearly the horizon has improved and this can speed up to some extent the return of Ireland to the market."
Thursday's deal helped drive Irish funding costs to their lowest since before the start of the financial crisis in 2007 and further below those of euro zone peer Italy - a country that regularly sells bonds and maintains one of the most liquid debt markets in the world.
Ireland's 2017 bond currently yields 2.84 percent, compared with 3.26 percent on an equivalent Italian bond.
The plan adds to the positive momentum Ireland has already built up, which helped it issue 2.5 billion euros of five-year debt in January. The sale accounted for a quarter of the Irish debt agency's 10 billion euro target for the year.
Unicredit told clients on Friday that a deal it had recommended on Irish 2019 bonds outperforming equivalent Spanish debt should now bring greater profit that previously assumed. It expected the new Irish deal to add another 30 basis points difference between the yields.
Analysts said the Anglo Irish deal provided scope for a fresh rally in Irish bonds, adding to the extensive fall in yields seen since late July 2012 when the ECB announced a bond- buying support plan for peripheral states.
Commerzbank strategist David Schnautz said longer-dated Irish yield could fall another 50 basis points on the back of the deal.
So the next test for Ireland is to issue a new 10-year bond - a popular maturity with investors that is currently missing from Ireland after two years frozen out of the market.
"We view (Thursday's) deal as being strongly supportive of Irish government bond yields going forward, and of the (debt agency's) wish to issue a syndicated 10-year bond in the near future," said Owen Callan, bond dealer at Danske Bank, a primary dealer in Irish government paper.
As part of the agreed debt swap Ireland will issue new government bonds worth 25 billion euros with maturities of between 25 and 40 years. These bonds will initially be held by the Irish central bank.
The terms of the deal stipulate these bonds will have to be slowly drip-fed into the market, with a minimum of 500 million euros to be sold by the end of 2014, 500 million euros annually between 2015 and 2018 and increasing amounts from then on.
The Irish finance department said this would be done in an orderly fashion to avoid flooding investors with debt and market participants see the presence of ultra-long term bonds in the market as another support for launching a new 10-year issue.
Phillip O'Sullivan, chief economist at NCB Stockbrokers said the ultra-long term debt was likely to stir demand for longer-dated Irish issues and, coupled with an improved overall outlook, encourage the debt agency to launch a new benchmark "in the near future".