Irish bank losses could reach 35 bln euros - IMF

By Lesley Wroughton

WASHINGTON (Reuters) - The International Monetary Fund on Wednesday said Ireland's recovery from a sharp economic contraction and financial crisis will be slow and painful and estimated that bank losses could reach 35 billion euros.

IMF Mission Chief to Ireland Ashoka Mody said repairing Ireland's financial sector, addressing rising public debt and making the economy more competitive were essential for a solid and sustained recovery.

He said the Irish authorities have responded appropriately to the crisis but cautioned that "the size of the problem is such that the road ahead is a long one."

In an annual health-check of the economy, the IMF forecast Ireland's economy will contract by 13.5 percent between 2008 and 2010, and start to grow around 1 percent in 2011 before it stabilizes around 2.5 percent for several years.

The IMF said a proposed agency, the National Asset Management Agency (NAMA), to carve out bad loans on banks' balance sheets was the right vehicle to begin Ireland's bank restructuring process.

But it said NAMA's responsibilities should include all classes of soured bank debt and not just commercial property loans, since bank losses are likely to extend beyond the property development sector as the economy weakens.

"NAMA should be given the legal and operational flexibility to address all classes of distressed bank assets," the IMF said, adding "A number of (IMF) directors considered that, for bank restructuring, other options including a greater equity interest by the government should not be ruled out."

Mody said NAMA's success will depend on complex decisions that will need to be taken in coming months, including how to price toxic bank assets.