By Padraic Halpin and Carmel Crimmins
DUBLIN (Reuters) - Ireland struck a long-awaited deal on Thursday to ease the burden of debts it took on to rescue its banking system in a way that will cut its budget deficit and borrowing needs and put it on track to end its reliance on EU-IMF loans this year.
Prime Minister Enda Kenny won European Central Bank (ECB) approval to stretch the cost of bailing out Anglo Irish Bank over 40 years, ending a high stakes saga that has preoccupied the nation for nearly two years. It was due to pay it off in 10 years, straining the state's finances and hobbling the economy.
"Today's outcome is an historic step on the road to economic recovery," Kenny told a packed parliament in Dublin. "It secures the future financial position of the state."
Kenny's jubilant speech met with sustained applause from government supporters in the chamber and stony silence from the opposition. There was an unemotional reception to the deal in Frankfurt, where ECB President Mario Draghi said simply that the Governing Council had unanimously "taken note" of Dublin's plan.
The low-key assent marked one of the greatest triumphs for Kenny's government, which had staked its credibility on a deal.
Technical negotiations between the ECB and Irish officials have dragged on for nearly two years, with the central bank conscious that any deal given to Dublin to ease the crunch in debt repayments could set a precedent for other countries, such as Spain, which are also dealing with large bank debts.
However, European leaders were also keen to offer a success story from the region's debt crisis to encourage both voters and potential investors. Replacing promissory notes, or IOUs, given by Ireland to the former Anglo Irish with longer-term government bonds will help Dublin emerge from the policy strictures of an EU-IMF bailout package on schedule this year.
Dublin's borrowing requirements will be cut by 20 billion euros over the next decade and 1 billion euros will be shaved off its annual budget deficit, still proportionately among the highest in Europe despite years of tax rises and spending cuts.
"The new plan will likely materially improve perceptions of our debt sustainability in the eyes of potential investors in Ireland," Kenny said.
"A successful Irish exit from the bailout by the end of this year would prove that a combination of intensive national reform efforts and European solidarity can deliver results."
Yields on benchmark Irish 2020 bonds, which rose to a high of almost 15 percent 18 months ago when the euro zone debt crisis was at its height, fell 10 basis points to 4.041 percent after Kenny's speech.
"It certainly is unusual in the history of the crisis that we are actually being surprised in a positive way by the scale of the response," said Austin Hughes, chief economist at KBC Bank. "Normally we have seen underachievement and overpromising.
"The early indications are that this will make a material difference for the outlook on the Irish economy."
Under the terms of the deal, first reported by Reuters on Wednesday, Anglo's promissory notes, with an average maturity of between seven and eight years will be exchanged for government bonds with an average maturity of over 34 years. The first principal repayment will be made in 2038 and the last in 2053.
Kenny rushed through emergency laws to liquidate Anglo Irish in the early hours of Thursday morning, the first part of a plan to avoid having to keep paying 3.1 billion euros annually on the Anglo Irish promissory notes.
That annual payment was equivalent to more than 670 euros ($900) for every single person in the country.
Anglo Irish and its profligate lending policies were at the heart of Ireland's financial crisis. The bank's near-collapse in 2008 pressured the government into guaranteeing the entire financial sector, sucking it into a downward spiral and in late 2010, a 67.5-billion euro loan from the EU and IMF.
Ireland's central bank governor presented the plan on Anglo Irish to his colleagues on the ECB Governing Council on Wednesday night in Frankfurt.
The ECB had rejected a preferred solution two weeks ago when Dublin wanted the Irish central bank to hold a long-term bond for a minimum of 15 years, a proposal Frankfurt deemed to be "monetary financing", prohibited by EU law intended to prevent governments in the euro zone destabilizing the currency.
(Additional reporting by Stephen Mangan and Conor Humphries in Dublin and Laura Noonan in London; Writing by Carmel Crimmins; Editing by Alastair Macdonald)