German Chancellor Angela Merkel has dealt a major blow to Ireland’s hope for an Irish bank debt deal by stating that no funds from the new European Union bail out fund can be used retroactively.

Last June Prime Minister Enda Kenny told the Irish media that the new fund would be used to pay down ireland’s bank debt which is over $100 billion, the amount the Irish taxpayer paid to bailout their bankrupt banks.

Merkel made her remarks after a meeting in Brussells at which there was widespread  speculation that a deal had been agreed to restructure Ireland’s debt.

Instead she made clear that none of the new bailout money would be used retroactively.

Merkel stated bad assets held by Spanish and Irish banks would not be dealt with by the  €500bn rescue fund called the ESM -- and stated the money could only be used for future crises.

She said "There will not be any backdated direct recapitalisation. If recapitalisation is possible, it will only be possible for the future, so I think that when the banking supervisor is in place we won't have any more problems with the Spanish banks -- at least I hope not," she said. Though she did not mention Ireland it is also included.

Back in June Kenny though he had a deal that it would be used retroactively and stated it was a "seismic shift".

Irish government figures rushed to limit the damage.

"Do we believe retrospective debt is still alive for Ireland? Yes,"  a source said.

However, Fianna Fail's finance spokesman Michael McGrath said the statement from Merkel "completely undermines the credibility of the Government's approach to the negotiations on bank debt".

German leader Angela MerkelGoogle Images