DUBLIN (Reuters) - Ireland is the first euro zone country to emerge from a bailout brought on by unsustainable debt, but the long slog of cutting back what it owes is only just starting for its 4.6 million austerity-hit people.
How its succeeds or fails in this will be a guide to how easily other heavily indebted states such as Portugal and Greece will be able to ease up on austerity as they strive to escape from their own bailout programmes.
Growth has returned in Ireland. Unemployment is falling and Irish debt is attracting bumper demand. But the recovery remains fragile, exposed to shocks elsewhere and needing more money to be taken from the economy this year to complete rebalancing.
"There's no doubt that with a high debt level, we're exposed to a shock, but that's going to be the case for probably the next decade as we strive to bring the debt ratio down," Rossa White, chief economist of the National Treasury Management Agency (NTMA), told Reuters.
For the public, that means continued tough times. For example, public services, particularly health, are still being cut back, a new property tax will be fully implemented this year and charges for water supply are being introduced.
The government aims for economic growth of 2-3 percent over the medium term to start bringing down a debt load that is at 120 percent of national output, versus the 60 percent or less sought by the European Union for its members.
Dublin forecasts another six years of consistent growth are needed to bring its debt below 100 percent and while there is no immediate pressure point, it has to tread carefully with its battered banks - which could yet need more cash - and in addressing a funding hump in early 2016.
Dublin's debt ballooned from 47.2 billion euros (38.8 billion pounds) in 2007 to 192.5 billion in 2012, in large part due to its rescue of crashing banks, for which it still seeking European help.
That pushed it into an 85 billion euro bailout that was completed in December. But the banks remain a major headache, despite having passed a review of their assets late in 2013.
The state holds 99.8 percent in two of the three domestic lenders, Allied Irish Banks (AIB) and permanent tsb (PTSB). It would be the primary source of funds should they need more capital after European Central Bank stress tests later in 2014, which will assess lenders' ability to withstand future shocks.
But together with the state's stake of 14 percent in Bank of Ireland, these holdings are also a major plank in the debt reduction strategy. The Bank of Ireland holding could be worth 1.5 billion euros at current prices. The AIB and PTSB stakes are harder to estimate given they have almost no free float.
"With the rising property prices, we don't envisage capital being required in the Irish banks," Finance Minister Michael Noonan told Reuters.
"But the bottom line ... is if you knew the answer before the stress tests, you wouldn't have to do the stress tests."
SETTING A PRECEDENT
Ireland has a certain amount of breathing space because yields on 10-year paper have fallen to 3.3 percent from a peak above 15. The average interest rate on the whole debt load is only about 4 percent and the country is already funded into 2015.
That helped persuade Dublin not to take a backup credit line when Ireland emerged from the bailout, relying on the strong cash position and being able to sell debt on the market.
It is a pointer in particular for Portugal, which aims to complete its bailout in June.
"Ireland's definitely set a precedent, even the language around the Irish exit, and I think it's defining the debate elsewhere," said Mujtaba Rahman, director for Europe at political risk consultancy Eurasia Group.
But Ireland has one more austerity budget ahead for next year, taking up to 2 billion euros out of the economy, and with unemployment still above 12 percent there is still pain ahead for people who have already endured six years of cuts.
In the EU it trails only Greece, Italy and Portugal in terms of debt as a proportion of national output, but Noonan is already talking about easing income tax to sweeten the pill of cuts elsewhere and bolster still lacklustre domestic spending.
"Challenges remain, risks are there. In Ireland certainly the debt ratio is now much higher," said Klaus Regling, head of the euro zone's bailout fund, on a recent visit.
Dublin's European partners could ease the process if they agreed to help with the bank rescue, which cost Ireland 64 billion euros - 40 percent of annual output - but there are few encouraging signs from Brussels.
Ireland says by injecting the cash and not burning bond holders, it saved the European banking system from contagion.
"Any decision made would have to be unanimous, so it's not an automatic situation where you ask and you get," Noonan said. "We're not taking it off the table because we see it as a solemn commitment made."
But the comfortable financing situation does take some of the pressure off and the NTMA debt agency will try and ease the 2016 funding squeeze by starting to top-slice the 10.2 billion euros on a bond maturing in April that year.
"I would see the bigger (economic) threat coming from external factors, the withdrawal gradually over time of the monetary stimulus, particularly in the U.S., and whether that can be handled in an accident free manner," NTMA head John Corrigan told Reuters.
"We will be entering unprecedented territory." ($1 = 0.7298 euros)
(Editing by Jeremy Gaunt)