DUBLIN Dec 20 (Reuters) - Europe should consider additional support for Ireland to ensure the success of its 85 billion euros EU-IMF bailout in the face of a deepening euro zone crisis, the International Monetary Fund said on Tuesday.
Europe's financial woes are jeopardising Ireland's ambition to return to market funding in 2013 and the IMF suggested a range of options to help the country's banks and improve its appeal to private investors.
"Deepening strains in the euro area have ... increased risks to Ireland's debt sustainability, so prospects for program success remain fragile," the IMF said in its latest staff report.
The IMF said it and Europe had agreed to a request from Dublin to bring forward disbursements for Ireland to the first quarter of next year from the second half to help reassure investors amid current market turbulence.
The IMF's mission chief for Ireland told reporters the Fund was not ruling out the possibility that Ireland could return to full market funding when the bailout ends in late 2013.
"What we are saying is that additional support would reinforce the programme and improve the prospects for success. We certainly haven't ruled out success at this point," Craig Beaumont, mission chief for Ireland said in a conference call.
"The main thing that would be desirable would be to break this link between the sovereign and the financial system more effectively then has been done so far."
Ireland's government, lauded internationally for its success in meeting its fiscal and banking targets, has already started lobbying Europe for help in cutting the cost of its bank bailouts and the IMF backed those efforts on Tuesday.
In its report, the Washington-based institution said Europe could consider offering Ireland's banks, including Bank of Ireland and Allied Irish Banks, guarantees for term funding, medium-term funding, help on deleveraging costs and possibly taking temporary equity stakes in them.
The IMF also said Europe could consider refinancing the cost of Ireland's bank bailouts on better terms. Dublin has poured 63 billion euros into its banks to keep them afloat after a devastating property crash and the fate of the sovereign is tied to the lenders.
The IMF also mentioned using the greater flexibility of the euro zone rescue fund, the EFSF, to help Ireland return to the bond markets at a reasonable cost.
European leaders have agreed to give the EFSF the power to finance the recapitalisation of banks via loans to government.
FINANCING BROUGHT FORWARD
Out of the 85 billion euros bailout package, Ireland is providing 17.5 billion of its own resources and it is planning to start issuing short-term paper next year as a prelude to a full return to market in 2013.
Beaumont said accelerating the disbursement of funds into the first quarter of 2012 would help Ireland start accessing the market in that year.
"This will strengthen the government's cash balance throughout the whole of 2012 which we think will, in the context of the increased volatility in European bond markets, improve market confidence and thereby enhance the possibility for the government to regain market access."
The IMF and Europe have so far lent Dublin nearly 30 billion euros and they will lend over 23 billion euros in 2012.
In the face of a weakening growth outlook for next year, Prime Minister Enda Kenny has already raised the size of the fiscal adjustment for 2012 to 3.8 billion euros from 3.6 billion and the IMF said Dublin should not hike the adjustment again to avoid "amplifying recessionary shocks".
The IMF said if the spending savings Dublin was planning for 2012-2014 looked in jeopardy, Kenny had "fallback options" to cut public sector wages and primary social welfare rates again.
Public sector unions, however, have signalled that if the government breaks a pledge not to cut wages again they will go on strike.