Morgan Stanley is facing a €12 million (£9 million) legal action after turmoil in credit markets forced the investment bank to abandon plans to enter the Irish mortgage market.

The bank hoped to sell as much as €900 million worth of Irish residential mortgages, the lawsuit says, and appointed a local sales intermediary before the credit crunch forced it to abort the venture last November.

The intermediary, Rossbank, is now suing Morgan Stanley for at least €12 million in compensation, claiming the investment bank breached their agreement by unilaterally abandoning the venture, which aimed to sell mortgages to Irish people buying holiday homes in Europe.

The aborted Irish deal was a casualty of a wider shakeup that saw Morgan Stanley substantially scale back its global residential mortgage business resulting in 600 job losses, including 90 in the UK.

In a claim filed at the High Court in London, Rossbank accused Morgan Stanley of placing it in “in a very serious predicament which could be terminal”.

Rossbank, which could not be reached for comment, is still registered with the Irish Financial Regulator. Sources close to the group said it had become "dormant" after the deal collapsed.

Backed by several prominent Irish businessmen including Eamonn Rothwell, chief executive of Irish Ferries, Rossbank is demanding Morgan Stanley repay around €3 million it invested in setting up the mortgage venture.

It is also claiming compensation for around €9 million of commission that it expected to earn through the deal. Under the agreement, Rossbank would receive commission for any business it introduced to Morgan Stanley that resulted in a mortgage deal.

The lawsuit also includes a demand for additional, unspecified compensation for commission Rossbank expected to earn through a €1.2 million advertising deal with Ryanair, the low cost airline.

A Morgan Stanley spokesman said the lawsuit is without merit and that the bank will contest it.

According to documents filed at the High Court, Morgan Stanley assured Rossbank during initial negotiations in October 2007 that its balance sheet was "sufficient to see it through the present difficulties”.

Five weeks later, however, Morgan Stanley abandoned the deal claiming it “would need to raise margins to such an extent as to be commercially not viable,” Rossbank said.

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