DUBLIN, Jan 27 (Reuters) - Failure to strike a deal with the European Central Bank on key bank debt talks could be catastrophic for Ireland, Deputy Prime Minister Eamon Gilmore will tell European leaders on Sunday.
The ECB rejected Ireland's preferred solution in protracted talks over how to reschedule part of its state-owned bank debt, Reuters reported exclusively on Saturday, citing EU sources familiar with the discussions. One of the sources said the ball was now back with the Irish government.
Gilmore will tell the EU-Latin America Summit on Sunday of the urgent need for an "appropriate deal" with the ECB, his office said in a statement containing exerts of his speech.
"Failure to conclude negotiations on the promissory note would have a potentially catastrophic effect on Ireland," Gilmore will tell the meeting being attended by EU Commission President Jose Manuel Barroso, European Council president Herman van Rompuy and German Chancellor Angela Merkel.
Dublin wants to avoid having to pay a politically incendiary 3.1 billion euros ($4.2 billion) a year until 2023 to service a promissory note it issued to underwrite failed Anglo Irish Bank and has proposed converting the note into long-term government bonds.
The sources said the ECB's Governing Council discussed the plan for the first time at a meeting on Wednesday and Thursday and agreed that it amounted to "monetary financing" of the Irish government, banned under article 123 of the EU treaty.
One source said all involved in the talks want to find a solution by the end of March, when the next payment is due. Dublin postponed last year's 3.1 billion euro cash payment in a complex arrangement, under which it issued a 13-year bond.
Irish ministers have been confident that a deal regarding the full 31 billion euro promissory note will be found by March, although finance minister Michael Noonan, who last week reiterated that agreement was likely, cautioned that significant outstanding matters could derail it.
Irish Prime Minister Enda Kenny told Reuters Insider television in an interview on Friday that getting relief on the promissory note was a crucial part of his country's path to returning to full market funding this year after its EU-IMF bailout programme expires.
Ireland, which began its gradual return to capital markets last year, has already raised a quarter of the 10 billion euros it aims to borrow this year to fully fund its post-bailout needs in 2014. ($1 = 0.7421 euros) (Reporting by Padraic Halpin; editing by Jane Baird)