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Financials

UPDATE 1-Ireland says "bad bank" to be off balance sheet

* Eurostat allows Ireland to keep bad bank outside budget

* Dublin’s liabilities still increasing by 54 bln euros

(Adds more comments from minister)

DUBLIN, Oct 20 (Reuters) - The European Union will allow Ireland to keep its proposed “bad bank” project off its budgetary balance sheet, Irish Finance Minister Brian Lenihan said on Tuesday.

The National Asset Management Agency (NAMA) is expected issue debt worth 54 billion euros to pay for banks’ risky property loans with a total book value of 77 billion euros -- a huge potential burden for a country struggling to cut one of Europe’s biggest deficits.

“The preliminary decision of Eurostat means that the acquisition of the assets from the financial institutions by NAMA may be treated as off-balance sheet in the budgetary arithmetic under European national accounting rules,” Lenihan said. “In other words, it will not increase the general government debt ratio and neither will our budget balance be directly affected by the NAMA initiative,” he said in a statement.

NAMA, which will take over loans from the likes of Allied Irish Banks ALBK.I and Bank of Ireland BKIR.I will nevertheless increase the state's potential liabilities, Lenihan added.

“This basic fact should not be overlooked,” he said. “However, neither should it be overlooked that these liabilities will be matched by a countervailing asset holding.”

The decision by Eurostat, the European Commission’s statistics authority, is preliminary but it is expected to be upheld in the final judgement, Lenihan said.

Reporting by Andras Gergely; Editing by Ron Askew

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