DUBLIN (Reuters) - Ireland's EU/IMF lenders will allow it to spend more proceeds from the sale of state assets on stimulating the economy, suggesting greater willingness within the euro zone to temper relentless austerity with some growth strategies.
Marking the halfway point of its three-year aid programme, Ireland passed the latest review of its bailout on Thursday and reached an agreement to carve out a viable bank from troubled lender permanent TSB as a basis for rebuilding the country's banking system, which was devastated by a property crash.
However, the European Union and International Monetary Fund said Ireland's considerable challenges include only modest growth prospects, prompting the lenders to offer some leeway on their previous insistence that Dublin should spend at least two-thirds of cash earned through asset sales on paying off debt.
The move adds to signs that leaders of the European Union are rethinking how best to clean up after a decade-long credit boom that left governments and consumers laden with debt.
European Central Bank President Mario Draghi has called for a "growth compact" and Italy's Prime Minister Mario Monti, installed to get the country's huge debt burden under control, said on Thursday that concentrating on budget savings alone could leave the continent in a prolonged slump.
With the strong performance of Socialist Francois Hollande in the first round of the French presidential election and the Dutch government's collapse in a row over budget cuts putting growth firmly on the European agenda, Ireland was given some extra if limited room for manoeuvre.
"It is becoming commonplace across Europe now for mainstream political parties to be committed to jobs and growth, but there is a serious lack of practical proposals underpinning the effort," finance minister Michael Noonan told a news conference.
"We have some of our own resources and we will get extra resources from the sale of state assets but there needs to be a shift in Europe as well so that there are European mechanisms to provide us with extra capital."
Ireland, which plans to sell stakes in energy utilities, a former state airline and its forestry, had previously agreed to raise its target for the sale of state assets to 3 billion euros ($4 billion) in order to keep 1 billion to invest.
It has not yet been agreed exactly how much more will be put aside for the new found focus on growth that IMF mission chief Craig Beaumont said was necessary given weakness in Ireland's trading partners that is hurting its strong export industry.
That slowdown, which has forced Ireland back into recession, has also dented prospects for this year and Noonan said his department will likely trim 2012 GDP forecasts to around 0.75 percent from 1.3 percent when they publish figures next week.
Irish debt is set to peak at 119 percent of gross domestic product (GDP) next year.
Having ticked all the boxes laid out by its paymasters and avoided the kind of deep recession seen in fellow bailed-out countries Greece and Portugal, Ireland is seen as having the best chance of emerging successfully from its support programme.
Yet risks include a referendum next month on the EU's new fiscal treaty and steps to be completed to straighten out the banking sector and deal with remaining bad debts.
Noonan confirmed that permanent tsb will be allowed eke out a viable future by moving its bad assets off balance sheet, meaning three lenders will now emerge from an almost fully nationalised sector whose soaring losses on property lending tipped the country into its bailout 18 months ago.
In a surprise move, Dublin opted to put off a fresh round of bank stress tests set to take place in November to align them instead with a European-wide check up due early next year.
Noonan said this showed that external authorities see that Ireland no longer needs to be treated as an exceptional case.
Analysts said it was a sensible move to give banks room to restructure.
"It's not a bad idea to give them a bit of breathing space given that they are trying to rapidly deleverage under the troika plan and trying to get a handle on the mortgage problem where arrears are rising very fast," said Owen Callan, a senior dealer at Danske Markets. ($1 = 0.7559 euros)
Writing by Padraic Halpin; Editing by Ruth Pitchford