Prospect of easing Ireland's debt burden played down

A senior European Central Bank member has played down the prospect of the debt burden arising from the State’s banking crisis being eased, saying that such a move would undermine confidence in the country.

Speaking in Dublin today, Jorge Asmussen said that “any desire to offload this debt could have dire consequences”. He added that seeking to reduce the debt would signal that the current debt level was not sustainable.

Mr Asmussen, a German national, said Ireland had “a very good chance” of borrowing normally by next year, thereby allowing it to exit its EU-International Monetary Fund bailout by the end of 2013.

He said that the ECB was “ready to work with the Irish authorities” in proposals to restructure the promissory notes used to honour the commitment of defunct banks.

He noted, however, that the full cost of the promissory notes as they now stand had been factored into the EU-IMF bailout programme. “Any deviation from that programme should be considered very carefully indeed,” he warned bluntly.

Earlier, Mr Asmussen said he did not "see any need for additional capital" for Ireland's banks and that the ECB's view was that the country won't need a second bailout.

Mr Asmussen also had words of caution for the banks, saying Irish institutions must "substantially" reduce their reliance on central bank funds to restore the financial system to health.

"The current amount of liquidity support extended by the ECB and the Central Bank of Ireland needs to be substantially reduced over time," Mr Asmussen. "We expect that the Irish authorities and the banks are working hard to achieve this."

Irish banks are tapping about €125 billion in loans from the ECB and the central bank, after the bursting of a property bubble led to the State receiving an international bailout in 2010.

Mr Asmussen said any proposal to replace the promissory notes with a bond from Europe's bailout fund would need to occur in conjunction with a reduction in borrowing from the Central Bank. "It should improve the chances of both the State and the banks returning to market-based funding, and of the banks reducing their extraordinary reliance on the euro system," he said.

The State avoided a €3.1 billion promissory note payment due last month by issuing a long-term Government bond to Irish Bank Resolution Corporation, which is managing the winding-up of Anglo.

Minister for Finance Michael Noonan has said negotiations are ongoing over the remaining €27 billion due on the notes, which the Government is hoping it can be repaid over a much longer period.

Irish Bank Resolution Corporation, the former Anglo Irish Bank and Irish Nationwide, which is winding down the lenders, uses the notes as collateral to borrow emergency loans from the Central Bank.

Mr Asmussen also said that even though the so-called fiscal compact agreed by European leaders this year to improve budgetary co-ordination and surveillance "won't suffice" in the long term, it is of the "utmost importance" that all euro members adopt it.

Additional reporting - Bloomberg