THE INTERNATIONAL MONETARY FUND has upped the ante in the talks on a deal to split Ireland’s banking debts from its sovereign debts, calling on the Eurozone’s finance ministers to implement a previous agreement without delay.

The IMF’s latest quarterly update on Ireland’s progress under the bailout repeatedly refers to the deal reached by European finance leaders on June 29, when it was agreed that ministers would take whatever measures were necessary to split the banking burden from the sovereign one.

The report, published this afternoon, outlines that the best-case scenario for helping Ireland return to the bond markets is for the European Stability Mechanism to take an equity stake in Ireland’s banks – effectively meaning that the ESM would match the money invested in the banks by the Irish state, freeing up Ireland to take its own investment back out again.

In the report, the IMF writes that breaking the link between the banks and the state is the single most important task to “improve the sustainability of the well-performing adjustment programme”.

“Material investments in Irish banks by the ESM could transform the public debt outlook, cut the bank–sovereign link, and cement a needed win for Europe,” it bluntly states.

“More broadly, Ireland’s policy programme is sound and adjustment is being delivered, providing strong prospects for program[me] success. These would be improved by more benign market conditions and more effective policy action at the European level,” it later adds.

The report is positive about Ireland’s progress to date, halfway through the EU-IMF lending programme, and notes that Ireland’s deficit reduction plan was ahead of schedule by the end of July – but added that similar progress in 2013 could be undone by further financial risks.

The government had done commendable work and had ”restored policy credibility, but risks to outlook remain substantial,” the report said. “Ireland must continue to deliver on the many difficult steps needed to underpin a sustained economic recovery.”

Europe poses risk to recovery

Though the report remarks that lots has been done to stabilise the economy and begin to bring Ireland back to the bond markets, “public debt is high and still growing” – while the banks are still not supplying the needs of households and SMEs.

It later adds that “deep and sustained financial sector reform efforts are needed to restore banks’ ability to support sound credit and revive domestic demand” – adding that it was vital for the banking sector to return to profitability so that lenders were encouraged to offer credit to households and businesses.

With the debt crisis continuing to cast an uncertain future on the outlook for the Eurozone, exports are also at risk – meaning the overall economic recovery remains very risky.

The report sees the IMF rein in its projection for Irish economic growth in 2013 – from 1.9 per cent to 1.4 per cent, largely as a result of a drop in demand for Irish exports as the economies of continental Europe continue to stutter.

IMF country director Craig Beaumont told a conference call of reporters that there was no ‘Plan B’ for alternative funding for Ireland if it had not regained market access by the time the first funding package had run out.

Asked by TheJournal.ie if a contingency plan was in place should the German constitutional court rule that the ESM is illegal, Beaumont said the current plans were being applied “very vigorously”.

“We’ll come to that hurdle when we reach it,” he said.

Read: Ireland making ‘such good progress on all fronts’ – Van Rompuy