DUBLIN - IRELAND faces the worst recession in the developed world and a particularly long struggle to bail out its property-crippled banks, the International Monetary Fund forecast on Wednesday.

The Washington-based lender said the government of Prime Minister Brian Cowen was adopting the right tactics to get the country back on the right course - but is not pessimistic enough about its immediate prospects.

It said Ireland should expect to see its economy shrink 8.5 per cent this year, unemployment rise from the current 11.8 per cent to 15.5 per cent next year, and lose 35 billion euros (S$71 billion) - about 20 per cent of its gross domestic product - in defaulting loans chiefly to property developers.

All those figures are worse than the projections of the government, which is trying to raise taxes and cut spending to combat a runaway budget deficit. It also is trying to keep from nationalizing the country's two major banks by founding a new 'bad bank' that will buy an estimated 90 billion euros in dud property loans at a discount.

Finance Minister Brian Lenihan said he welcomed the report as 'a balanced and realistic assessment of the challenges we face, and also endorses the actions that we are taking'.

The report said Ireland could not count on wooing a new wave of foreign investment, its recipe for success during the heady Celtic Tiger years of 1994-2007. It said Ireland today was the most expensive in the 16-nation euro zone, and the government faced years of confronting labour unions over the need to cut wages, particularly in the nation's state-paid work force.

It appealed to Ireland to do much more to cut spending, rather than raise taxes, its main approach this year to trimming a budget deficit. It specified that the government must trim welfare benefits, a politically explosive move.

The IMF said this year's government red ink would reach 12 per cent, more than the government's goal of 10.75 per cent. It also said the government was optimistic to think it could bring deficit spending back within the European Union's euro-zone limit of 3 per cent by 2013, forecasting this would take a year longer.

The fund's experts also cautioned Ireland that it faced grave risks in forging a 'bad bank,' to be called the National Assets Management Agency or NAMA, and might ultimately be forced to nationalize either of the two dominant banks. It argued that NAMA would find it difficult to determine fair prices for the defaulting property portfolios of the banks - and if it paid too much, taxpayers would unfairly carry the can for the banks' bad decisions.

During its boom years, the Irish economy grew increasingly dependent on construction and property speculation, bloating government coffers. Those tax revenues disappeared when the property bubble spectacularly burst last year in response to the global credit crunch. -- AP