The head of the eurogroup of euro zone finance ministers has said that it will be "politically difficult" for Ireland to secure the retroactive direct recapitalisation of Irish banks via Europe's permanent bailout fund, and that any request would have to be "realistic".
Speaking in Luxembourg after the launch of the European Stability Mechanism (ESM) annual report, the Dutch finance minister Jeroen Dijsselbloem said retroactive recapitalisation was technically possible but politically "difficult".
This was because of the cap of €60bn that was placed on the ESM's capacity to put money directly into banks that were in trouble, he said.
Last week euro zone officials agreed the guidelines on how the ESM could be used in future to recapitalise banks which got into trouble.
Those guidelines now require to be approved by 17 euro zone governments, including a number of parliaments, before the instrument is in place, with November the expected start date.
"In the political agreement the possibility of retroactive use is left open, so once the parliamentary procedures have been completed and the instrument becomes available, technically speaking it would be possible," Mr Dijsselbloem told the news conference.
"Politically, it would be difficult and if you look at the size of the instrument there has been a cap on the size of the instrument that could be used, that could also put a constraint on what we can do.
"The next step is to complete the parliamentary procedures to get it up and running, and then we'll see whether there are any realistic requests from the member states to use the instrument, that will be right order," he said.
The Irish government has long sought ESM funding for Ireland's pillar banks AIB, Bank of Ireland, and Permanent TSB which were bailed out using public money in the aftermath of the property market collapse.
On Monday a senior euro zone official said it would be "extremely unlikely" that Ireland would be able to access the €500bn ESM fund because of political and technical hurdles, partly because access was conditional on the private sector and national funds "bailing in" a troubled bank first.
Yesterday the Minister for Finance Michael Noonan told the Oireachtas finance committee that once the facility is up and running in November, Ireland may decide to wait some time before making an application to the ESM for retroactive funding.
A Department of Finance source insisted that Article 14 of the guidelines which will be sent to Eurozone parliaments and governments explicitly provides for the potential for retroactive recapitalisation of banks by the ESM.
The source said that the way the article was structured means that any technical aspects on how it could be done would be agreed in advance before the board of the ESM were to give its approval for the capitalisation to go ahead.
The source pointed out that, as Mr Noonan told the finance committee yesterday, the application for a retroactive recapitalisation depended very much on the value of the pillar banks, AIB, Bank of Ireland and Permanent TSB, and whether the state would be better off offering the shares to a higher bidder than the ESM if the value of the banks increased, as it already had done with Bank of Ireland.
It is understood the Government would see an potential of the ESM taking an equity stake in Irish banks as providing a price floor which could attract higher bidders.
Meanwhile, speaking on his arrival at today's meeting of the eurogroup, Mr Noonan said he no longer believed that a €2bn adjustment would required in October's budget in order to get Ireland's budget deficit below 3% by 2015.
"The €2bn is the ways and means of arriving at a particular target. But it's not the target. The target is to get the defict below 3% [by 2015]...
"There's data coming through now, some of it soft data, some of it anecdotal, and it seems to me we will not require that level of adjustment, but I'm not in a position to say now how much leeway we'll have... What I'm saying is, whatever it takes to get below 3%, we'll do that. But I no longer believe it will take €2bn."
Warning over 'reform momentum'
Meanwhile, in its annual report for 2013, the ESM noted that Ireland had exited the EU-IMF programme smoothly and that it had reduced its budget deficit from 8.1% in 2012 to 7.1% of GDP last year.
However, the report warned that the "Irish authorities need to maintain the reform momentum".
The report adds: "As the government deficit and debt remain high, Ireland requires a fiscal policy consistent with fiscal targets set in the Stability and Growth Pact [which requires a deficit of 3pc of GDP]."
The annual report also found that in 2013, thanks to a reduction in the interest rate and an extension of the maturities for the bailout loans, Ireland had made a saving of €680m or 0.4% of GDP, compared to €8.58bn for Greece, or a 4.7% share of GDP.
Officials pointed out that the large discrepancy in savings was because Greece had by far been given the biggest bailout, and had also been given an interest holiday of 10 years.