The Central Bank has warned that risks of further falls in property prices, weaker growth and possible capital shortfalls in state-owned banks continue to threaten Ireland's debt sustainability.

Ireland is hoping to return to bond markets in the next 12 months to build up enough funds to exit a three-year EU/IMF bail-out programme.

But in a staff macro-financial review, the Central Bank says the market's views of Irish debt remained at a level incompatible with access to long-term funding.

It says sovereign debt sustainability is vulnerable to further unexpected increases in debt levels or reductions in economic growth and warns throughout its report of the risks across the economy of further property price declines.

The Central Bank says, however, that any actions that would help to manage bank debt taken on by the State would improve financial markets' perception of Ireland's creditworthiness. That is understood to be a reference to the ongoing issue of the Anglo Irish Bank promissory notes.

The report has identified risks due to continued economic weakness and over-indebted private and public sectors.

It has warned that mortgage stress, poor profit outlooks and funding pressures could see the fresh capital put into the country's banks erode quicker than expected.

"It is clear that, despite the exceptional scale of policy interventions domestically and significant progress in the stabilisation and restructuring of the financial system, its transition to a fully normal mode of functioning is not yet complete," the report says.

Property prices have halved since the building boom ended in 2007 and the Central Bank says continued falls could result in increased loan losses for Irish banks that it says are expected to remain at high levels for some time regardless.

Using its current forecast for unemployment and house prices, the bank projects that the 90-day owner-occupier mortgages arrears rate will rise to just above 10% this year from 9.2% at the end of 2011.

It adds that the banks, already planning thousands of job cuts, will have to cut more costs, that they face further eroding of margins due to the high cost of funding and will have difficulty significantly increasing deposit volumes given the weak economy.

"Banks face the challenge of generating recurring earnings in an environment of limited ability to re-price tight loan margins and funding cost pressures," the report says.

Noonan confident of deal on Anglo notes

Finance Minister Michael Noonan has said he is confident of a deal over the weekend in talks with the European Central Bank about the promissory note payment to the former Anglo Irish Bank.

He said this morning that talks with the ECB on a payment of €3.1 billion to Anglo at the end of this month were going well.

The Finance Minister said the Government had a lot of friends in Europe who were anxious to help and assist. He added that there were some technical difficulties which needed to be worked out, but he was hopeful of a result.

He said the talks were at a delicate stage, adding that a result would not be achieved by going public on every detail.

When asked when he thought the talks would finish, the Minister replied that they would continue over the weekend. He said it was something that must be done fairly quickly.

He also said the deferral of the payment at the end of March was just one element, and that the bigger picture was to secure an easier way of paying the promissory note. He said this would be less onerous on the taxpayer and that the serious piece of negotiations would happen in the second part of the year.

Moody's analyst cautious on notes deal effect

A leading analyst with credit rating agency Moody's has said a deal between Ireland and its lenders to delay or freeze the upcoming promissory note payment will do relatively little to help the country's funding outlook.

In an interview with Dow Jones Newswires, Dietmar Hornung, said a delay would help ease funding pressures but would not lift concerns about Ireland's long-term debt burden.

He said a deal to lower the interest payments on the notes would put Ireland in a "slightly better" position, but not significantly lower Ireland's debt burden.