The European Central Bank has dismissed reports that Ireland's preferred option on the promissory note deal had been rejected, saying negotiations were still under way and conclusions on their outcome were premature.
It follows an earlier report from news agency Reuters, which said that the ECB had rejected a proposal to convert the note into long-term Government bonds that would be taken up by the Irish Central Bank.
Under the proposal, the Central Bank would then keep the bonds in its portfolio for a long period of time.
The Government wants to avoid having to pay €3.1 billion a year until 2023 to service a promissory note it issued to underwrite Anglo Irish Bank during the property crash in 2008.
Reuters quoted sources who said that the ECB's Governing Council had discussed the plan for the first time at a meeting on Wednesday and Thursday and agreed that it amounted to "monetary financing" of the 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 the Department of Finance 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 1%, according to Department of Finance estimates.
Reuters' source said everybody involved in Ireland, the European Commission, eurozone 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.
Taoiseach Enda Kenny told Reuters Insider television in an interview yesterday that getting relief on the promissory note was a crucial part of Ireland's path to returning to full market funding this year after the 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," Mr Kenny said, calling the talks with the ECB technical and complex.
The aim was to re-engineer, restructure the note and extend the maturity over a much longer period, he said.
Relations between Ireland and the European monetary authority have been tense since the ECB refused during the bailout negotiations to allow Ireland to make senior bondholders of Irish banks take a share of the losses incurred in the rescue.
Mr Kenny said the Government remained "confident that we'll have a deal concluded by the end of March when the next payment is due".
Another EU source said one of the outstanding issues was whether the ECB could accept the swapped Irish bonds as collateral in its refinancing operations.
Central Bank Governor Patrick Honohan, who represents Ireland on the ECB's board, described Ireland’s proposal last week as a "novel" solution to reach a deal which would not take policymakers too far out of their comfort zone.
Mr Honohan said a solution was not yet "done and dusted" but ministers have been far more confident with Mr Noonan repeating last week that a deal was likely, although he cautioned that significant outstanding matters could derail it.
Ireland postponed last year's €3.1bn cash payment by issuing a 13-year bond and had floated the idea of replacing the rest of the payments with loans backed by eurozone bailout cash, but have concentrated their efforts on settling the issue with a long-term bond.
European Economic and Monetary Affairs Commissioner Olli Rehn told Reuters that eurozone governments were looking at ways to help Ireland back to full market access that could include extending the maturity of the bailout loans it received in late 2010 or possibly extending a precautionary credit line from the eurozone's ESM rescue fund.
The latter option could open the way for the European Central Bank to buy short-term Irish bonds on the secondary market to help bring down its borrowing costs under the ECB's Outright Monetary Transactions policy.
However, a source familiar with ECB thinking said the Governing Council would rather hold its OMT weapon in reserve as a deterrent and not use it, noting that Irish borrowing costs had already fallen substantially and the spread over German ten-year bonds reflected market assessment of the credit risk.
He also said he did not expect Spain to request a precautionary credit line to trigger ECB intervention this year since its spread too had fallen to a level that reflected credit risk rather than any market premium due to a perceived risk of the eurozone breaking up or Spain exiting.