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The International Monetary Fund is becoming a major player in euro zone politics. Last month it forced the monetary union's leaders to bring down Greece's debt. Now it has focused its attention on Ireland, Europe's poster boy for austerity.

The fund said earlier this week that Dublin should delay any further austerity by two years if next year's growth target of 1.1 per cent proves too optimistic. And it stepped up calls for a deal on Ireland's bank bailout, which at over 40 per cent of annual output, has left the country with a heavy debt millstone. Back in June, the euro zone made vague promises to tweak Ireland's program, but has done little so far.

The IMF is calling on the euro zone to enable its European Stability Mechanism (ESM) bailout fund to recapitalize banks directly, bringing down Ireland's debt and removing future potential liabilities. That is unlikely to go down well in Germany, where some voters see direct recapitalization as back-door debt mutualization. The fund is also pushing for a restructuring of the IOUs used to prop up the remnants of Ireland's failed banks, the Irish Bank Resolution Corp. (IBRC) That too would require concessions; either a commitment by the European Central Bank to fund the IBRC over the long term, or additional long-dated cheap funds from the ESM.

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Europe may reason that Ireland doesn't need help. Dublin is regaining market access, and its 10-year bond yields are 65 basis points lower than Spain's – they were 3 percentage points higher just a year ago. Yields should fall further if the ECB ever starts buying Irish bonds.

There are still reasons to help. Ireland's debt is set to hit 122 per cent of GDP next year, and its population faces a fiscal consolidation effort of more than 5 per cent of GDP through 2015. Employment is still falling, and nearly 17 per cent of mortgages are in arrears by more than 90 days. Austerity has its limits, and taxpayers resent having to prop up their banks for the sake of wider euro zone stability.

Dublin may not be the only country to gain from the IMF's new activism. If Spain finds itself forced into a bailout, the fund could prove a useful ally against the ECB and the European Commission. Another reason why a bailout may not be such a terrible thing.

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