Central Bank governor Patrick Honohan: concerns from ECB

The Irish authorities are in a fight this weekend with the bailout troika of the International Monetary Fund, the European Commission and the European Central Bank over how much the Irish public should be put on the hook for the tens of billions of euro the ECB has loaned Irish financial institutions in recent weeks.

The battle is over how much the Frankfurt-based ECB wants to be repaid of the €90bn which it loaned the Irish domestic banks up to the end of October.

Frankfurt appears to also want to put a cap on loans, amounting to almost €35bn, which the Irish Central Bank had advanced in emergency funding to at least three of those banks since the summer.

The outflow of deposits in recent months from Irish banks - totalling tens of billions of euro - dramatically increased the funding demands of the banks here.

The ECB has loaned €130bn to Irish banks, but that sum includes cash advanced by Frankfurt to banking operations in the International Financial Services Centre (IFSC).

Much of this has been to provide liquidity to replace deposits which have been fleeing Irish banks recently.

Bank of Ireland and AIB together have lost €23bn, according to official statements.

The hardening of the ECB's line in recent weeks came as Irish banks burned through the eligible assets that Frankfurt was prepared to accept in return for its cash, according to sources.

The banks have in some cases pledged most of their available collateral and risk being closed out of even the ECB's emergency funding in a matter of weeks if a solution is not found.

According to market sources, Irish Life & Permanent, a heavy user of the ECB emergency funds, can make it only until January on available collateral.

"They've gone back full circle on the whole thing," said a bond analyst at a Dublin securities firm.

"It's like September 2008 all over again."

It is understood that the ECB communicated its growing concerns in increasingly direct messages with the Irish Central Bank over a week ago.

But a leading sovereign bond expert warned that the debt crisis facing Ireland and the eurozone peripheral nations would not end if Frankfurt were to press for repayment of its funding from the bailout cash.

Sovereign bondholders have become increasingly concerned because the troika appear to have ruled out negotiating any discounts on the private bank debt held by private bank bond holders.

Nonetheless, the cost of insuring all types of Irish private bank debt rose sharply last Friday, suggesting that private bank bond holders fear they will be forced into negotiations with the Dublin lenders.

A leading Central Bank watcher, Lorcan Roche Kelly, said that Dame Street's loans to Irish lenders had increased to €34.6bn by the end of October from €14.3bn in August.

The ECB's funding of all Ireland-based banks, including those in the IFSC, rose to €130bn from €95bn over the same period.

The sovereign debt insurance markets continue to suggest that sovereign bond holders fear they will not get fully repaid in the coming years.

There remains a 35% risk of Ireland defaulting on its sovereign debt, according to CMA Datavision.