Insight: Irish banks at mercy of international paymasters

By Laura Noonan and Padraic Halpin

LONDON/DUBLIN (Reuters) - Ireland's banking recovery could yet be derailed by its international creditors.

The European Central Bank's refusal so far to give Dublin any relief on the 30-billion euro cost of bailing out Anglo Irish Bank is a major setback for government ambitions to exit an EU-IMF bailout this year and give the euro zone its first post-crisis success story.

The failure to agree a deal on Anglo Irish also overshadows the country's banks.

Nearly all nationalized in the wake of a property crash and with their liabilities guaranteed by taxpayers, the fortunes of Ireland's lenders are tied to the state and they need Dublin to strike a deal with the ECB to ensure they too can make a return to full market funding.

"The country is crying out for progress on a deal," said Jeremy Masding, CEO of rescued mortgage lender permanent tsb. "That would give a huge boost to the country's confidence."

As reported by Reuters, the ECB rejected Ireland's preferred solution for restructuring the cost of propping up Anglo Irish because it amounted to "monetary financing" of the government.

Under the current arrangement, Dublin must pay 3.1 billion euros a year until 2023 to service a promissory note it issued to underwrite Anglo Irish. Finance Minister Michael Noonan had proposed converting the note into long-term government bonds that would be taken up by the Irish Central Bank.

Ireland's creditors at the EU, the ECB and the IMF have also shelved a parallel plan to rid the Irish banks of loss-making mortgages that track the ECB borrowing rate, three sources close to the talks have told Reuters.