THE MARKETS may be disappointed by the absence of an improvement in Ireland’s debt position from a deal on the cost of the bank bailouts, according to a report by Goodbody Stockbrokers.

The broker believes that a bank deal in October will commit to a restructuring of the remaining €27 billion State promissory notes used to bail out Irish Bank Resolution Corporation, the former Anglo Irish Bank which is also running down Irish Nationwide.

A verbal agreement on future direct bank recapitalisations is also expected by the broker.

“This would represent a step in the right direction but the market may be disappointed by an absence of an improvement in Ireland’s gross debt position,” say Goodbody economists Dermot O’Leary and Juliet Tennent.

Mr O’Leary said that he doesn’t see Ireland getting “a meaningful deal” on its bank debt before there is an agreement on the Spanish banking bailouts, the timing of which have been “pushed out”.

To correct the mistakes of the past, namely repaying senior bondholders of Anglo and Irish Nationwide in full, the European Central Bank “must accept that it will be supporting Ireland’s banking system for longer than it desires”, Goodbody says in the report.

To help the State repay its debts, the deal must include “a much slower pay down” of emergency loans by IBRC and may also involve a wider restructuring of the banks “by way of transfer of loss-making tracker mortgages”.

One option would be to set up “a Nama II vehicle” to buy tracker mortgages from the banks by issuing Government-guaranteed debt, but the transfer must take place at a price “that does not lead to further questions about capital adequacy of the Irish banks”.

Re-engineering the promissory notes in IBRC offers the “greatest potential” to improve the State’s debt sustainability but the ECB had to be involved, the report says.