THE European Central Bank is likely to ask the Government to guarantee at least some of the money it gives to Irish banks under a new "medium-term facility" designed to ease the strain on Ireland's banks.
The news comes after it emerged on Saturday that the Frankfurt powerhouse is close to finalising a new bank funding facility that would loan money to Irish banks on a "medium-term" basis.
The support would allow Irish banks to end their €70bn dependence on emergency liquidity channelled through the Central Bank of Ireland and would give depositors more confidence in the banks' future.
The Government has also been battling to ensure that the latest banking bailout finally ends the links between the fate of Ireland's banks and the fate of the Irish sovereign.
It is understood, however, that the ECB wants the Irish Government to guarantee some of the sums advanced to Irish banks by the new medium-term facility, an arrangement that would see the fate of the sovereign and the banks remain entwined.
The issue arises because the €70bn of so-called "exceptional liquidity assistance" being provided to the Irish banks is covered by an explicit government guarantee. The ECB believes this guarantee should migrate over to the new facility.
A spokesman for the Department of Finance declined to comment on a "hypothetical" situation. The department has not publicly confirmed the ECB's new facility. It is unclear if the new facility has formally been offered to Ireland.
A spokeswoman for the ECB also declined to comment.
The government guarantee for the €70bn already loaned arose because the "emergency" cash was being secured against assets that would usually be ineligible for the ECB's "main" operations.
"What you're talking about is lending money to banks who have no eligible collateral, of course you're going to want some kind of guarantee (in the new facility)," one source said.
The news comes as the Central Bank of Ireland prepares to unveil the results of the latest banking stress tests on Thursday, in the hope of finally putting a definitive cost on the bank bailout bill.
The ECB may make an announcement about the new facility at that point, however their spokeswoman declined to comment on that yesterday.
A spokesman for the Department of Finance also declined to comment on whether Thursday's announcement would include details of the broad restructuring of the Irish banking sector.
The authorities have been weighing up three options that would allow the banks to get about €80bn of loans off their balance sheets cheaply, helping them to hit loan-to-deposit targets set down in the IMF/EU bailout.
The scenario emerging as the front runner involves the banks holding the surplus assets in an "internal non-core bank" that would be separated out from the main entity.
Another option would see the excess assets from all banks sold to a state-owned Nama II.
The third involves the four banks becoming the owners of an industry-wide vehicle that would collect repayments on the excess loans and sell them on once the market recovers.
The decision on which path to follow is likely to need to be rubberstamped by the Cabinet. The International Monetary Fund and the European Commission will also be involved.
A spokesperson for the IMF yesterday declined to comment in advance of Thursday's announcements, as did a spokesman for the commission. Banking sources say they have been given "no indication" which option will be taken.