March 14, 2012 / 4:13 PM / 5 years ago

Irish banks hamstrung by tracker mortgages -minister

DUBLIN, March 14 (Reuters) - Ireland will not be able to fully fix its banking system until a sector-wide resolution to the problem of loss-making tracker mortgages is found, the country's deputy finance minister said on Wednesday.

Tracker mortgages make up more than 50 percent of Irish banks' residential property loans, and though the debts have remained sound, they are not earning profits for the lenders due to a mismatch between high funding costs and the low ECB rate that the products track.

"Until the issue of the tracker mortgages, right the way across the Irish banking sector, is resolved we are not going to make the kind of progress that we need," junior finance minister Brian Hayes told state broadcaster RTE.

The government is considering plans to shift the loans from some of its banks, possibly to an off-balance-sheet vehicle, Hayes said.

"Whether or not a new vehicle is to be established that would park the trackers so that banks could get on with other business, that is an issue that they are now currently looking at," he said.

Of the three main domestic lenders, the government holds majority stakes in Allied Irish Banks and Irish Life and Permanent unit permanent tsb and a minority stake in Bank of Ireland

Hayes was responding to a question on talks to restructure permanent tsb, but he did not specify which banks might be involved.

Loss-making tracker mortgages make up about 60 percent of permanent tsb's 26 billion euro ($33.6 billion) Irish mortgage book.

The government is holding talks with its EU-IMF creditors about the possibility of moving the tracker loans as part of negotiations to reduce the cost of Ireland's bank rescue by refinancing around 30 billion euros' ($40 billion) worth of promissory notes, Finance Minister Michael Noonan said on Sunday.

Noonan said a deal on tracker mortgages would boost the value of the country's banks, allowing the state to sell its stakes and use the money to reduce its national debt, but he did not say what mechanism might be used and said a decision was not imminent.

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