By Padraic Halpin
DUBLIN (Reuters) - Clearing house LCH.Clearnet hiked margin requirements for Irish debt on Wednesday and Ireland's central bank said it would take a closer look at banks' residential mortgage books as concern mounted about the country's finances.
Ireland's tottering government is struggling to prove it does not need a Greek-style bailout to help it reduce the worst budget deficit in Europe and markets are concerned it will struggle to pass the first of four austerity budgets next month.
They also fear Ireland may yet have to do more to bolster its discredited banks, left deeply in debt when property and construction markets imploded, despite a huge recapitalization program designed to shore up the system.
A slump in commercial property prices brought the banks to the brink of collapse last year and residential mortgages are seen as the next big threat.
The central bank said it would embark on a more "granular analysis" of this part of the banks' books when it reviews their capital levels next year.
"Despite recent trends in arrears and reschedulings, there is as yet no hard indication that the stress levels would be exceeded," Central Bank Governor Patrick Honohan said in a speech at a financial summit in Dublin.
Ireland shocked investors in September when it said the final bill for purging its banks of years of reckless lending could top 50 billion euros, compounding skepticism about the country's ability to get its fiscal house in order.
Honohan raised the prospect that one day foreign buyers could buy up blocks of Irish mortgages and possibly even the banks themselves.
"From a national point of view, the entry of foreign purchasers for some or all of the banks would help transfer both credit and liquidity risk to those in a better position to bear them," he said.
"This is not as far-fetched a scenario as it might appear to some; astute bankers recognize that there is profitable banking business to be done in Ireland in the years to come, though they will differ on the optimal timing and pricing of entry."
The European Commission approved the extension of Ireland's guarantee of bank liabilities until June 30 next year, underlining that the banks are dependent on government and indeed ECB support to survive.
LCH.CLEARNET
The premium investors demand to hold Irish government bonds rather than benchmark German Bunds rose to a lifetime high on Wednesday after LCH.Clearnet said it would ask its members to put up more collateral to trade Irish government bonds.
It had said on October 5 that it had introduced a new policy that would enable it to request an extra 15 percent margin from members in the event that the yield on a European government bond exceeded 450 basis points compared to the German bund.
The yield spread between 10-year Irish government bonds and their benchmark German counterparts widened by 10 basis points on Wednesday to 592 bps.
LCH.Clearnet, which clears Irish government bonds on behalf of its investment bank clients, said it will increase the margin required to trade Ireland's debt by 15 percent from Thursday.
Prime Minister Brian Cowen has a wafer-thin parliamentary majority and investors are nervous he will fail to pass his budget next month. Many now think only a general election that would give the opposition a workable majority will calm jitters.
A coalition between center-right Fine Gael and the Labour party is expected to pursue deficit-cutting strategies broadly similar to ruling Fianna Fail's planned 15 billion euro adjustment between now and 2014.
Finance minister Brian Lenihan told BBC's Newsnight program late on Tuesday he believed measures the government was taking would ensure it could repay its debts.
"We've made it a cardinal plank of our policy that we intend to pay our debts as a state, we will pay our way and we are determined to do that."
(Reporting by George Matlock, Paul Day, Michael Holden and Luke Jeffs)
