* IMF says prospects for successful Irish bailout are fragile
* Calls on Europe to give more aid to Irish banks
* IMF and Europe will disburse all financing for 2012 in H1
* Says Ireland shld avoid ramping up 2012 fiscal adjustment
* Says cutting public wages, welfare rates are fallback options
By Carmel Crimmins and Conor Humphries
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 escape its bailout straitjacket and 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 programme success remain fragile,” the IMF said in its latest 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 about its liquidity given 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 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 to help cut the cost of its bank bailouts.
The IMF said Europe could consider offering lenders, including Bank of Ireland and AIB, 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, excluding interest costs, into its banks to keep them afloat, pushing its debt to dangerously high levels.
Taking stakes in Ireland’s banks or refinancing the existing bank bailouts would help assuage some of the public anger in Ireland over the European Central Bank’s (ECB) refusal to allow Dublin to impose losses on some senior bank bondholders.
But analysts said Europe was unlikely to dig deeper any time soon.
“The Europeans have been holding Ireland up as a model of success and from the point of view of meeting targets the programme has been successful thus far and I think the Europeans will go along with that line in the short term at least,” said Dermot O‘Leary, economist at Goodbody Stockbrokers.
“I think they will do more in the medium term because I think the programme will fail if they don‘t.”
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.
Out of the 85 billion euro 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 the 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.
The IMF also said Dublin needed to strengthen the restructuring plan for bancassurer Irish Life & Permanent, whose future has been clouded after the the sale of the life business collapsed in November.