The Irish Independent reports that the Government now favours a gradual wind-down of Anglo Irish Bank, rather than the so-called "good bank/bad bank" model proposed by the bank's management, the newspaper understands.

Discussions involving the Department of Finance are now focusing on the gradual wind-down of the bank. The Government has cooled on the idea of splitting the bank in two and putting 20pc of its assets into a new entity, but no final decision has been made by the EU Commission.

However, the Government remains totally opposed to any short-term closure of the bank and is determined to honour all obligations to depositors and bondholders, senior sources have said.  A total wind-down of the entire loan book now looks to be on the cards, which would rule out the possibility of establishing a new business bank from the wreckage of Anglo. At present, Anglo chief executive and chairman Alan Dukes wants to put 20pc of the bank's assets into a new entity, with the rest of the loans being run down over time.

Meanwhile, it has emerged that government departments and state agencies have placed deposits of €645m with Anglo, up from €436m at the end of last year -- a rise of 48pc

There were also loans outstanding between Anglo and state agencies, but these have been eliminated since the Dublin Docklands Development Authority (DDDA) moved its Irish Glass Bottle site loan into NAMA.

The bank is also taking a tougher approach with customers and its results this week disclose that interest roll-ups, where the bank adds outstanding interest to the back of the loan, are being reduced.

"The bank's credit policy was revised in 2009 to restrict the approval of new or extended interest roll-up facilities,'' said the half-year results published on Tuesday.

These results also revealed that of the top 20 customer, one particular customer accounts for 6pc of total loans.

This is believed to be the loans held by Sean Quinn and his family. In addition, a further two customers have borrowings in excess of €500m.

In total, there are 21 customers with borrowings in excess of €250m.

The bank, meanwhile, has a €9m deficit in its defined-benefit pension scheme, which is very small compared with the deficits at other Irish banks.

Within government circles, there is a growing acceptance Anglo Irish Bank will be gradually closed down over a shorter period than previously envisaged. Ministers have insisted there is no difference between Fianna Fail and the Greens on the future of Anglo.

The Irish Independent also reports that Ireland is poorly insulated against further financial shocks -- but we are unlikely to renege on our debts, the International Monetary Fund (IMF) says in a series of reports published today.

Ranking nations by how well protected they are against a further unforeseen shock to their economic systems, the IMF puts Ireland above Greece, Italy, Japan and Portugal and alongside Iceland, Spain, Britain and the US in a list of countries where national debt is likely to become unsustainable based on past performance.

The IMF also praises Ireland's efforts to restore competitiveness, saying it had been painful but returned the economy to growth. "Ireland faced a significant competitiveness disadvantage in 2009, but its real effective exchange rate is currently viewed broadly in line with medium-term fundamentals. This improvement was associated with a deep recession, but Ireland has recently returned to relatively rapid growth," the IMF says.

Despite the rising cost of borrowing for Ireland and Greece on the bond markets, the IMF says highly-indebted states are unlikely to default on bond payments as they struggle to tame their deficits.

"In our view, the risk of debt restructuring is currently significantly overestimated," the IMF adds. Defaulting on debt would make little sense for countries such as Ireland.

Despite this optimism, the IMF warns that the most indebted economies are approaching a "debt limit" beyond which their fiscal positions may become unsustainable. "Debt limits are not etched in stone, but they show that a fundamental change in behaviour relative to historical patterns will be needed to restore sustainability. In other words, 'business as usual' won't cut it," said IMF official Jonathan Ostry.

Countries should target debt levels well below their debt limits because governments may get little or no warning about imminent spikes in borrowing costs or curtailed access to markets as public debt rises or as views about fiscal risks or the reliability of fiscal data change, Mr Ostry adds.

Long-term action

The IMF urges long-term action to reduce borrowing and debt in advanced economies.

"Advanced economies must pursue long-term policy reforms to reduce public debt levels over the coming decades and ensure future fiscal sustainability," according to the IMF. "In order to protect the fragile economic recovery, support growth and job creation and provide reassurance to capital markets, fiscal adjustment plans must be clearly defined -- but with a focus on the medium term rather than seeking a quick fix.

"Public debt levels among advanced economies have reached levels not seen before in the absence of a major war," said Carlo Cottarelli, the director of the IMF's fiscal affairs department and an author of two of the reports.

Mr Cottarelli blames high public debt on weak fiscal policy over the last few decades, when debt levels ratcheted up during hard times but failed to fall in better years.

"The task ahead is all the more complicated because aging societies and global warming are putting additional pressure on public finances. This calls attention to the critical need for long-term fiscal reforms that will guarantee a gradual but sustained improvement in debt positions over the coming decades," he added.

The Irish Times reports that Minister for Finance Brian Lenihan has moved to counter fears that the economic recovery has stalled.

Mr Lenihan said last night the economy has stabilised despite the release yesterday of a raft of figures and indicators which raise fresh questions about the health of the economy. Most of the new numbers suggest that the mild recovery, in evidence earlier in the year, has plateaued. Some of the indicators point to renewed weakness.

Mr Lenihan said: “We are seeing an economic stabilisation, and growth as well.”

The numbers out of work and claiming unemployment benefit both rose in August, according to figures released yesterday by the Central Statistics Office (CSO).

Unemployment inched up from 13.7 per cent in July to 13.8 per cent in August. When adjusted for seasonal factors, the dole queues swelled by 2,500, to reach a nation-wide total of 455,000 people.

The deterioration in the labour market in August led to the fourth consecutive month of rising joblessness. The percentage of claimants in receipt of benefit for more than a year also continued to rise, and now approaches one in three of the total.

Retail sales figures for July disappointed too. These numbers, which are among the best indicators of consumer spending, registered yet another monthly decline. Trading volumes and turnover were both down, with totals back to levels registered at the turn of the year.

The CSO numbers show that 10 of 13 retail subsectors experienced a weakening of sales in July when compared to June. Retail Ireland, a group that represents the sector, described the figures as “very disappointing”.

The number of mortgages arrears, released by the Central Bank yesterday, are less timely than the other indicators, relating as they do to the quarter ending in June. Nonetheless they are significant as they show that the numbers of people struggling to service their mortgages continued to rise rapidly.

As a percentage of total mortgage holders, 4.6 per cent were more than 90 days behind in their repayments. This amounts to 36,438 individual mortgages, representing an increase of well over one-third over nine months (when the figures were first published in September 2009).

In the manufacturing sector, a monthly survey undertaken by NCB stockbrokers found that industry continued to grow in August, but that the expansion was feeble and its pace slowed for two consecutive months.

Given the fresh concerns about the economy, the publication today of exchequer finances for August will be watched even more closely than usual.

Speaking in advance of the release, the Minister for Finance Brian Lenihan indicated yesterday that the figures will show that public finances have stabilised. VAT and excise revenues in August were both up on the same month in 2009. This could suggest that the decline in retail sales up to July was staunched in August.

Mr Lenihan said that his assessment was for economic growth this year. There were some difficulties, the Minister recognised, but the public also needed to look at positive aspects of the economic performance.

“We can surmount those difficulties. We have opportunities and it is important we realise them,” he said.

Asked about the latest unemployment figures, Mr Lenihan accepted that there had been an increase in the jobless total when seasonally adjusted. But he signalled that that increase would soon end. “It’s clear that unemployment will peak in the next few months, and then fall,” he said.

Fine Gael enterprise spokesman Richard Bruton said the latest figures suggested that Ireland was experiencing a second period of recession.

He said he based that view on the fact that unemployment numbers fell for eight months, but then rose in the four months to August.

“These figures confirm that the stabilisation of national income is not being reflected in the jobs market. The Government’s present strategy will, at the very best, produce jobless growth,” he said.

“A particularly worrying feature of the latest figures is the extent to which unemployment is becoming embedded. Almost a third of people out of work are now long-term unemployed. Twelve months ago long-term unemployment represented less than a fifth of the Live Register,” he said.

The Irish Times also reports that the rapid increase in the cost of rescuing Anglo Irish Bank is emerging as a prime concern in the European Commission’s scrutiny of the €25 billion plan to restructure the bank’s ailing business.

Although Anglo chief Mike Aynsley has argued that the price of recapitalising the nationalised lender can be contained at that level, officials in Brussels want reassurance that there will be no further escalation in the cost of keeping the bank afloat if they approve its restructuring plan.

All participants in the process are keen to bring matters to a conclusion quickly as they are concerned that the uncertainty surrounding the bank’s future is undermining confidence in the Government’s economic plan.

While the commission would not object on competition if the decision was taken to liquidate the bank, the Government fears that such a manoeuvre could seriously threaten the stability of Ireland’s already weak banking system and impose significant additional costs on the State.

Anglo was first recapitalised last year with a €4 billion cash injection from the State, but this capital requirement has been exceeded many times over following the transfer of its property loans to the National Asset Management Agency (Nama).

The commission is attempting to gauge the accuracy of projections which suggest that splitting Anglo into good and bad banks is the option with the lowest cost to the taxpayer, that is, some €25 billion.

With ratings agency Standard Poor’s suggesting Anglo may ultimately need €35 billion – something Mr Aynsley rejects – officials want clarity as to the exact extent of its capital requirement if it is to remain open as a going concern.

Alternatives such a liquidation of Anglo or a long- or short-term wind-down of its business have been ruled out by the bank and by the Government on the basis that they would carry greater cost to taxpayers and could impose fresh systemic pressure on other Irish lending institutions.

However, all assumptions linked to the plan are being tested by the commission.

Documents published in the Official Journal of the European Union say its scrutiny is designed to verify whether the plan is in keeping with European policy as regards the viability of the continuing business, burden-sharing between the bank’s stakeholders and whether sufficient measures have been taken to limit the distortion of competition in the market.

Informed sources say the “next cheapest” option to the good- and bad-bank plan is a long-term wind-down.

This is complicated, they say, by the distressed state of the market for assets financed by the Anglo’s loans and by a likely requirement for the State to support the bank’s funding needs during the wind-down period.

The restructuring plan has been with the commission’s competition division since the end of May, although final Government submissions went to Brussels only on Tuesday.

This second restructuring plan for Anglo was developed after the commission rejected an initial plan on grounds that it was excessively exposed to the property market and was based on assumptions that could not be supported.

The Irish Examiner reports housing charities are warning interest hikes could force tens of thousands into default as it was revealed more than 36,000 debt-ridden householders are three months or more behind with mortgage payments.

In a further blow to hopes that the economy is stabilising, figures also show consumer spending has declined once again.

According to the Central Statistics Office (CSO), retail sales fell 0.1% by volume in the 12 months to July and 0.2% from June. It was the first year-on-year drop in sales since January.

Further proof of the economic woes came from the Health Insurance Authority, which announced that 10,000 people, or 800 per week, gave up their private health insurance in the second quarter of this year.

"It now looks like we’re going backwards in terms of the economic performance. I think we’ve hit a wall," said Bloxham stockbrokers’ chief economist Alan McQuaid.

The number of failing home loans increased by about 4,500 between March and June, making up 4.6% of all mortgage accounts, according to the Financial Regulator. And with 466,923 people unemployed and up to three interest rate rises forecast for next year, campaigners warned the debt crisis and fear of homelessness would dramatically deepen over the next year.

Housing charity Respond said tens of thousands were at risk of default after lenders, including AIB and Bank of Ireland, hiked rates by up to 0.6% during July and August.

"Lenders need to realise that increasing rates is simply going to increase the financial pressure on people and will eventually lead to a considerable increase in arrears, even larger than what we’re seeing currently," said spokeswoman Aoife Walsh.

Some 387 homes were repossessed in the year to the end of June, but banks applied for 170 court actions against struggling homeowners – an increase of 5%.

Nonetheless Irish Banking Federation chief executive Pat Farrell said the figures showed mainstream lenders were focused on forbearance. "IBF mainstream lenders remain committed to doing everything possible to help people with genuine repayment problems; and early, constructive engagement between the borrower and lender is key to this."

Mr Farrell said his members were working on setting in train further safeguards and reassurance for distressed homeowners through the Mortgage Arrears Resolution Process.

Mortgages are worth a total of €6.9 billion, the latest quarterly report from the regulator revealed. It showed 36,438 households were 90 days or more in arrears at the end of June, with 24,797 of these 180 days behind with payments.

This compared with 32,321 in arrears for more than 90 days at the end of March.

PIBA, the country’s largest group of independent mortgage and insurance brokers, said it was a very worrying cycle for homeowners in difficulty and for the wider economy. Rachel Doyle, PIBA director, said rules on how to deal with debt-hit homeowners should take into account the still rising jobless figures.

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