DUBLIN (REUTERS) - Ireland has a good chance of exiting its bailout this year but would benefit from more European support in cleaning up its indebted banks and the safety net of precautionary funding, the International Monetary Fund (IMF) said on Wednesday.
Tight budgets in line with the conditions of its 85 billion euro (S$142 billion) bailout have helped Ireland get back on its feet.
In contrast to much of the euro zone, the country's economy has expanded for much of the last two years, and the Fund kept its growth forecasts for 2013 and 2014 unchanged, at 1.1 per cent and 2.2 per cent respectively.
The second euro zone country to be rescued by the IMF in 2010 after Greece, Ireland received its latest chunk of aid this week.
The fund said Dublin's fiscal consolidation was going as planned, but European help in cleaning up the banking sector would help its long-term return to debt markets.
"The policy programme of Ireland is sound and adjustment is being delivered, providing reasonably strong prospects for programme success," the IMF said in a review of the country.
The country has consistently hit the targets under the bailout and come closer to weaning itself off emergency aid by raising 5 billion euros in a 10-year bond sale in March.
But Dublin has several important hurdles still to overcome, and risks remain from factors outside its control. With domestic demand weak, much hinges on quickening growth in Ireland's main trade partners, particularly the euro zone, the IMF said.
Dublin must also keep up efforts to restore health to its indebted banks.
"Further European support in addressing the profitability challenges of the banks and in cushioning the impact of any capital needs that may arise would support recovery and protect debt sustainability, and thereby enhance prospects for a durable return to reliance on market financing," the review said.
Ireland agreed to a detailed review of its troubled banks'loan books this year ahead of stress tests in 2014 and the IMF's Irish mission chief Craig Beaumont said that the first exercise was not expected to lead to a need for capital injections.
In a parallel review of the Spanish economy on Wednesday, the Fund said Europe could also do its part there by quickly creating a banking union, helping to shore up a banking sector where bad loan rates were likely to rise further.
Overall, Spain had made strong progress in fixing its economy but needed to do more to cut high unemployment and shield the banks from recession, the IMF said.
The IMF also said it would not support calls by some politicians in Ireland to scale back targets for budget cuts and tax increases in 2014 and 2015 on the basis of savings from a bank debt deal struck with the European Central Bank (ECB) earlier this year.
Finance Minister Michael Noonan on Wednesday said he may have some leeway in the next budget in October to either ease planned austerity or use the spare funds to invest in the economy.
The government is also considering whether to go it alone when it comes off aid or take a precautionary credit line that would smooth its bailout exit but bring political difficulties.
Mr Beaumont said a decision on this would be taken in the autumn and indicated the Fund preferred playing it safe.
"We can see some advantages to having a backstop there. It would just be something that would give you that extra layer of confidence," he told a conference call.