The Central Bank is “not comfortable” with the high level of mortgage arrears but they were not unexpected, given the high level of household debt in the country,  the bank’s governor Patrick Honohan said today.

Speaking at the publication of the bank’s 2011 annual report, Mr Honohan said that it was “disappointing” that Irish bond yields remained at unfavourable levels halfway through the bailout programme but that it would be a “huge leap” to infer that this meant the country would require a second bailout.

He blamed the high bond yields in part on “very substantial external circumstances” and market conditions for countries with high debt levels, but declined to say what would happen if Ireland could not re-enter the bond markets as planned before the end of the programme in 2013.

“I don't really want to be giving out Plans B, C and D or stuff like that. Plan A is a good one," he said. “I think we are still in a position where we don’t need to start talking about other possibilities.”

The governor declined to answer questions on whether Greece would exit the euro or how this could affect Ireland.

The Central Bank is continuing its heightened involvement in the banks to ensure they deal with problem mortgages which are “on a scale that they have not been used to in the past”, said Mr Honohan.

Matthew Elderfield, deputy governor at the Central Bank in charge of financial regulation, said that they would be meeting the boards of the banks over the coming months and asking them to “take a direct and personal interest” in making sure that the banks are dealing with mortgage borrowers in difficulty.

The Central Bank is pressing Ireland's banks to carry out a detailed analysis of their mortgage books to find out which borrowers should voluntarily surrender properties and enter bankruptcy or change the terms of the loans if borrowers can repay them over time.

“If someone is deeply in arrears and has a real affordability problem, simply putting them on interest only isn’t going to work. You have got to tackle that,” said Mr Elderfield.

The Central Bank also wants the banks to take quicker action on buy-to-let investors with large property portfolios and unsustainable mortgage debt by appointing rent receivers, he said.

Mortgage lenders have also been asked to develop more skills and systems to understand and deal with the mortgage problems at the banks. The banks have struggled to cope as they had only “geared” to sell mortgages, said Mr Elderfield. “The scale of the problem has overwhelmed the banks and they weren’t well prepared for it,” he said.

The governor said that despite the mortgage problems there was no immediate need for further capital at the banks but that they would face upward pressure to raise capital to meet international standards over time.

Mr Honohan said that the Government has got the “hard choices” required in the proposed personal insolvency legislation “broadly right”.

The annual report revealed that Mr Honohan is taking a 23 per cent pay cut on his €276,000 annual salary this year, having taken a 15 per cent pay cut last year. He was paid €234,584 in 2011 and will be paid €213,000 this year, the report says. Mr Elderfield was paid €340,000 last year.

In response to a question about emerging problems at the Spanish banks, he said that it was a possibility that his idea of bailing out European banks directly from the EU bailout funds could be adopted “to meet the evolving circumstances”.

The governor said a deal on the Anglo Irish Bank promissory notes would be “valuable to have a longer term solution” and could help financial stability overall.

The Central Bank reported profits of more than €1.2 billion in 2011. The bank said in the annual report that surplus income of €958 million will be paid to the Exchequer, compared with €671 million in 2010. The value of the institution’s assets fell in 2011, to €173 billion from €204.5 billion a year earlier.

The bank made a provision of €300 million for risks stemming from monetary policy operations. Mr Honohan said that the risky environment facing central banks “certainly warrants a sizeable provision against future losses”.

"The provision reflects an estimated allowance for risks arising in respect of the securities held for monetary policy purposes," the Central Bank said. "The estimation of the impairment charge is subject to considerable uncertainty, which has increased in the current economic environment. It is sensitive to factors such as the market perception of debt sustainability."

The governor said the key focus of the Central Bank was continuing resolution of Ireland’s financial crisis, with a number of major reforms around restructuring and recapitalising the domestic banking sector introduced during the year.

Mr Honohan said compliance with the bailout programme objectives was the key to restoring confidence, and also signals what he said were important steps towards rebalancing and strengthening the economy.

“Progress continues to be made on the major policy issues. Under the EU-ECB-IMF Financial Assistance Programme, important elements of Ireland’s economic and financial policy framework have been agreed and set out in some detail,” Mr Honohan said in the report.

“This programme does not, however, represent a different course from that which Irish policymakers should and would otherwise have chosen.”

Mr Honohan's comments came as ECB policymaker Joerg Asmussen said there must be no softening of bloc's fiscal pact on budget discipline.

Mr Asmussen, who joined the ECB's Executive Board this year after serving as German deputy finance minister, said the right crisis response was "not less, but more Europe" and that fiscal union was ultimately the right path.

"The fiscal compact can be complemented by growth-enhancing measures. This makes sense as a supplement, but the fiscal compact cannot be renegotiated or softened," he said.