IMF cuts Irish outlook, urges more asset sales

People walk past a bank on Grafton Street in Dublin March 31, 2011.

DUBLIN (Reuters) - The International Monetary Fund cut its growth forecasts for Ireland on Wednesday due to a worsening outlook for the global economy and urged Dublin to target 5 billion euros (4.4 billion pounds) in asset sales, up from the 2 billion euros currently earmarked.

In its latest staff report on Ireland, the IMF also said euro zone leaders should consider additional changes to their temporary rescue fund to help Ireland regain market access amid ongoing uncertainty over Europe's debt crisis.

Ireland's borrowing costs have fallen sharply since European leaders agreed in late July to cut the cost of its 85 billion euros bailout package but the IMF warned that the risks to Dublin returning to debt markets remained significant.

"Notwithstanding the government's determination to implement the program, Ireland's prospects are dependent on the success of broader efforts to restore financial stability across the euro area," the IMF said in its report.

The Washington-based organisation said euro zone leaders should swiftly implement changes already agreed to the bloc's rescue fund, the EFSF, including the ability to provide precautionary financing, and consider other options.

"Such flexibility could be provided in a range of ways and it is a matter for the European authorities to consider the most effective and feasible from their own perspective," the IMF's mission chief for Ireland Craig Beaumont told a conference call.

Ireland's finance minister warned on Wednesday that the EFSF, with 440 billion euros in funds, was too small.

Ireland's government wants to make a tentative return to debt markets next year, possibly through the issue of short-term maturities, before making a full return in 2013, when its current bailout funds run out.

Yields on Irish 10-year paper have fallen below 9 percent after hitting highs over 14 percent in early July.

Irish 10-year debt was trading over 6.5 percent in late September, the last time the country held an auction for medium-term paper.

GROWTH OUTLOOK WORSENS

The IMF said Dublin was on track to meet its fiscal goals this year and ahead of schedule in restructuring its banking sector, but cut its growth outlook for the country for 2011 and 2012 due to weaker exports.

"The growth outlook for key trading partners -- the euro area, the U.S. and the U.K. -- has worsened substantially."

Beaumont declined to comment on whether the IMF had cut its growth outlook for the United States, the UK and the euro zone saying the organisation's world economic outlook would be published in the next few weeks.

The IMF estimates Ireland's Gross Domestic Product (GDP) will expand by 0.4 percent this year compared to 0.6 percent in the previous staff report in May and 1.5 percent next year compared to 1.9 percent previously.

Ireland's government has said it will have to downgrade its 2012 forecast, currently at 2.5 percent, and Finance Minister Michael Noonan warned this week that the government may have to target fiscal adjustments of 4 billion euros, up from 3.6 billion, to compensate for the weaker outlook.

Beaumont said the IMF would discuss the level of adjustment required at the next programme review in October.

"The proposed amount of the adjustment in the consolidation plan will need to take into account the economic outlook at the time," he told reporters.

The IMF called on Dublin to consider raising five billion euros in asset sales, as recommended by a government-commissioned group in April, to help reduce its level of indebtedness.

Beaumont said Washington would discuss the asset disposal programme with the Irish government by the end of the year.

"We are awaiting for the authorities to develop their plan," he said.

Fellow euro zone struggler Greece has to sell some 50 billion euros worth of assets.

Ireland's Transport Minister Leo Varadkar said on Wednesday he was considering selling the state's 25 percent stake in airline Aer Lingus (AERL.I). Dublin is also considering selling stakes in some of its energy firms.

Factoring in the cut to growth, Beaumont said Ireland's debt to GDP ratio to peak would peak at around 119 percent of GDP in 2013 compared to 118 percent estimated before the IMF downgraded its growth outlook.

Beaumont said the 1 percentage point worsening in the debt to GDP dynamics would be more than compensated for by the cut in the cost of Ireland's European loans.

(Additional reporting by Conor Humphries; Editing by Ruth Pitchford)