The European Central Bank has rejected Ireland's preferred solution to a dispute over the cost of servicing money borrowed to rescue a failed bank, EU sources familiar with the talks said on Saturday.
Dublin wants to avoid having to pay 3.1 billion euros a year until 2023 to service a promissory note it issued to underwrite failed Anglo Irish Bank during a meltdown of the main Irish lenders after a real estate bubble burst in 2008.
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 with the intention of keeping the bonds in its portfolio for a long period.
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.
"The ball is now back in the Irish court," one source involved in the deliberations said.
"This is an issue of principle. There is a real concern in the Governing Council because you can create precedents when you do things for one country. Then others may say 'why not for us?'," the source said.
"We must be sure the solution doesn't open a window in terms of monetary financing."
A spokesman for Ireland's finance department declined to comment. Officials from the central bank and government were not immediately available for comment.
Avoiding the hefty interest charge that kicks in with this year's payment would help reduce Ireland's budget deficit, still among the highest in Europe, by more than one percentage point, according to finance department estimates.
The source said everybody involved in Ireland, the European Commission, euro zone finance ministers and the ECB wanted to find a solution by the end of March, when the next payment is due.
Ireland had raised other ideas that were less problematic, he said, declining to go into detail.
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.
"We've made no secret of the fact that it's unfair. We are the only people who have had to put up with that," Kenny said, calling the