The success of Ireland's international bailout hinges on it getting more European support and there being economic recovery externally, the International Monetary Fund (IMF) said on Monday as it cut its growth forecast for Ireland for next year.
Euro zone leaders agreed at their summit in June to look at improving Ireland's bank rescue, a commitment that has pushed Irish bond yields down sharply and allowed Dublin to raise long-term debt for the first time since it secured the EU/IMF bailout almost two years ago.
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Ireland wants the terms tied to 31 billion euros of IOUs pumped into two failed banks eased and Europe's rescue funds to take over its stakes in other lenders, something the IMF said was needed to put the rescue program "on a clear path to successful completion".
"When implemented, recent European commitments could decisively improve program prospects... Success hinges on external economic recovery and more European support," the IMF said in its latest report on Ireland's bailout progress.
"Timely commitment to such a strengthening of European support, especially ESM investments in the equity of Irish banks, therefore offers real prospects for Ireland to exit its reliance on official financing, which would be a positive breakthrough in the euro area crisis."
While again praising Dublin for the "vigorous" policy implementation that has made it the toast of Europe's bailed out countries, the IMF noted that a deterioration in economic conditions outside of Ireland would hamper its growth prospects for this year and next.
It said it expected gross domestic product (GDP) to grow by 1.4 percent in 2013 and not the 1.9 percent predicted in June, while it also lowered its forecast for this year slightly, to 0.4 percent from 0.5 percent.
The updated figures were in line with downward revisions made recently by the European Commission, another of Dublin's "troika" of lenders, and published in a draft document seen by Reuters.
The IMF said the markdown would make the deficit targets harder to attain and that its medium-term growth scenario projecting an average growth of 2.75 percent from 2014-2017 also assumes a resolution of the euro area crisis over the next year.
Were GDP to expand by only 0.5 percent per year over the medium term, the country's gross debt would rise to 129 percent of GDP by 2017, instead of peaking at 119 percent of GDP next year, it added.
"If these risks to growth materialize, the effect on the fragile public debt path would be profound, with adverse implications for Europe," the Washington-based body said.
On the potential bank debt deal, it said the IOUs Ireland wants to refinance could be replaced by long-term government securities or European recuse funds, adding that a bond would avoid adding to debts that markets may consider senior.
The IMF also said that were Europe's permanent rescue fund to take over the government's stakes in its banks, it would have the added advantage of much improving their profitability and value and thus their capacity to provide sound lending.
Progress on working out troubled loans at the country's banks has not advanced as rapidly as would be desirable, the IMF concluded.