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DUBLIN (Reuters) - The European Central Bank (ECB) has warned that the Irish government faced the financial equivalent of a bomb exploding in Dublin if it failed to repay senior debt in the former Anglo Irish Bank, a government minister said on Sunday.
Ireland's government was swept to power last year after promising to impose haircuts on bondholders in Irish banks but dropped ambitions to impose losses on some senior bondholders in the now-defunct Anglo Irish Bank at the insistence of the ECB.
Transport Minister Leo Varadkar told broadcaster RTE that failure to repay senior bondholders in the nationalised lender would raise borrowing costs for other state-controlled banks and companies such as the state-run power groups, meaning consumers would end up with higher mortgage repayments and utility bills.
"What the ECB has said to us ... is that, it's on your head. We don't want you to default on these payments, it is your decision ultimately. But a bomb will go off, a bomb will go off in Dublin, not in Frankfurt, because of the reasons I've outlined," Varadkar said.
Ireland's government has to go on the defensive every time a senior unsecured, unguaranteed bond in Anglo Irish, recently renamed Irish Bank Resolution Corp, falls due. The next repayment date falls on Wednesday, when a 1.2-billion-euro (£996.7 million) note is up for redemption.
Repaying bondholders in Anglo Irish is hugely contentious because taxpayers face years of austerity partly to bail out the bank. Anglo Irish is a poster-child for the sort of reckless lending that forced Ireland into an EU-IMF bailout.
Ireland's government is trying to persuade its European partners to cut the cost of shoring up Anglo Irish Bank, estimated at 47 billion euros, and Varadkar also said defaulting on the bank's senior notes would not help those discussions.
Reporting by Carmel Crimmins; Editing by Dale Hudson