UPDATE 2-Dublin's wary cuts policy wins IMF-EU applause
* Ireland's 2012 deficit goal still 8.6 pct of GDP
* Noonan sees 2012 adjustment of under 4 bln euros
* Ireland developing action plan for permanent tsb
DUBLIN, Oct 20 (Reuters) - Ireland's government won enthusiastic backing from its EU-IMF creditors on Thursday for its policy of keeping austerity measures within bounds in order to protect the country's fragile economic recovery.
Ireland is meeting its targets under an 85 billion euros bailout but has faced calls from its own fiscal watchdog to accelerate cutbacks and tax hikes to reassure investors spooked by the Greek crisis that Dublin's debts are sustainable.
"If you go too far in frontloading the adjustment you take demand out of the economy," Finance Minister Michael Noonan told a news conference on Thursday after officials from the EC, the ECB and the IMF completed the latest quarterly review of Ireland's rescue package.
"Economists can look at things in narrow enough terms ... we have to look at things like social cohesion," he said.
Ireland's so-called troika of lenders has endorsed an existing plan to get the budget deficit, estimated to be around 10 percent of GDP this year, down to 8.6 percent next year.
Ireland was left with the worst deficit in the industrialised world after a property crash and banking crisis sent its once lauded economy plunging into recession.
"One of the things that investors tell me they look for in Ireland is.... Ireland's ability to create growth," said Ajai Chopra, the IMF mission chief.
Despite weaker growth forecasts for 2012, Noonan expects the size of next year's fiscal adjustment, which will be unveiled in early November, to be under four billion euros and signalled he would not raise income taxes or cut welfare rates.
A MEETING OF MINDS
With fellow bailout recipients Greece and Portugal struggling to meet their targets, Ireland is positioning itself as Europe's recovery story and the troika officials were effusive in their praise of Dublin's adherence to its plan.
"There is a very significant meeting of minds on the objectives and the way to meet those objectives," Chopra said.
But Dublin still wants to renegotiate aspects of its programme, including the troika's insistence that any privatisation proceeds be used to pay down debt rather than stoke economic growth.
"That is a position that they have not formally moved from ... but in principle they understand our position and are willing to engage," Minister for Public Expenditure Brendan Howlin said.
Ireland is also trying to win the troika around to supporting its wish to try to tap the euro zone's rescue fund to reduce the cost of financing its bank bailouts. However, any agreement on such a proposal would rest with euro zone leaders.
Currently, European leaders are split on how to strengthen the bloc's bailout fund.
Ireland has spent nearly 63 billion euros in state funds shoring up its banks and Noonan said he expected the country's lenders would have enough capital to withstand any new capital requirements agreed by Europe.
Chopra said Irish banks could do more to improve the transparency of their balance sheets, particularly on provisioning practices and loss recognition.
Question marks still surround the future of permanent tsb , one of Ireland's largest mortgage providers, laid low by its exposure to costly residential home loans that track the ECB base rate.
Noonan said Ireland had agreed to develop an "action plan" for the lender. Noonan is currently considering bids for Irish Life, permanent tsb's life insurance arm, whose cash reserves have helped bulk up the lender.
A failure to sell Irish Life, which has an embedded value of 1.6 billion euros, would mean the government has to put 1.1 billion euros into permanent tsb, on top of 2.7 billion euros already injected.
In addition to tackling its fiscal deficit and shrinking its banking sector, Ireland's bailout commits it to open up sheltered sectors of the economy to stoke growth.
Ireland has published legislation to reform its legal industry and make wage agreements more flexible but Istvan Szekely, the EC's country director for Ireland, said more needed to be done to cut medical costs.
A trip to the doctor's surgery in Ireland can cost around 60 euros.
"I am living in Brussels which is not at all a cheap place to live... I pay half the price you pay when I go to see a GP. Half," Szekely said.
"There is a long way to go here to improve things. It is very important."
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