UPDATE 1-Ireland plans to redo bank debt proposal
* Issues on proposal to ECB need to be changed-minister
* Deputy PM warns failure in talks could be catastrophic
* Ministers remain confident deal will be struck
By Padraic Halpin
DUBLIN, Jan 27 (Reuters) - Ireland will make changes to its proposal to ease the state's bank debt burden, government ministers said on Sunday, adding that failure to reach a deal with the European Central Bank could have catastrophic consequences.
The ECB rejected Ireland's preferred solution over how to reschedule part of its state-owned bank debt, Reuters reported exclusively on Saturday, citing EU sources familiar with the discussions.
Admitting that some "very difficult" issues remained outstanding, transport minister Leo Varadkar told national broadcaster RTE that changes were needed to what Ireland proposed, although the government has agreement in a lot of areas. He did not specify what those changes might be.
"Failure to conclude negotiations on the promissory note would have a potentially catastrophic effect on Ireland," Deputy Prime Minister Eamonn Gilmore told the EU-Latin America Summit in Chile, which was attended by German Chancellor Angela Merkel, EU Commission President Jose Manuel Barroso and European Council president Herman van Rompuy.
"Time is not on our side... The sacrifices made by the Irish people must not be squandered now."
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 issued to underwrite failed Anglo Irish Bank and had proposed converting the note into a long-term government bond.
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.
Varadkar confirmed that Ireland's proposal was discussed last week and suggested it could be looked at once more when the Governing Council meets again in two weeks' time.
Government ministers have for months been confident that a deal would be struck. Last week finance minister Michael Noonan cautioned that outstanding matters could derail the talks but reiterated that agreement was likely.
That confidence continued on Sunday.
"I believe and am absolutely satisfied that there will be an agreement before March 31," Communications Minister Pat Rabbitte told RTE.
Prime Minister Enda Kenny told Reuters Insider television in an interview on Friday that getting relief on the debt was a crucial part of his country's path to returning to full market funding this year after its EU-IMF bailout programme expires.
The International Monetary Fund, which with the European Union came to the country's aid in November 2010, has also said a deal is essential to ensure Ireland's smooth return to bond markets when its bailout ends this year.
Ireland, which began its gradual market return 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.
Yields on Irish 2020 benchmark debt have fallen to 4.1 percent from over 15 percent 18 months ago. The head of the country's debt agency said last week that markets had "to a greater or lesser extent" priced in a promissory note deal.
Traders did not expect Irish yields to climb on Monday as they expected the positive market sentiment that fuelled recent bumper Spanish, Italian and Portuguese bond auctions to continue.
"With the appetite for yield out there, I don't really see a major change until we get further clarification," said Ryan McGrath, a bond dealer with Dublin-based Dolmen Stockbrokers.