THE International Monetary Fund has backed Irish government attempts to get relief from the cost of rescuing the banks.
In an update to its World Economic Outlook, the IMF said Europe must do more to break the damaging link between bank losses and government debt.
The fund's implicit support came as sources reported progress yesterday in Brussels talks on the issue, which involve Finance Minister Michael Noonan.
The IMF called for expanded eurozone funds to re-capitalise banks and reduce the burdens on particular states.
"Individual countries under pressure may well require recourse to euro-wide resources to facilitate bank re-capitalisation," the report said.
"Instruments are needed at European level to deal directly with the banks," said Jose Vinals, director of the IMF's monetary and capital markets department
"In the near term, a pan-euro area facility that has the capacity to take direct stakes in banks will also help break these adverse feedback loops between banks and sovereigns," the report said.
The Washington-based IMF fears that the euro crisis could still spark a global recession which would see eurozone output plunge by 4pc. "Banking supervisors must do whatever is possible to avoid excessively fast bank de-leveraging that could lead to a devastating credit crunch," it said.
"The current environment -- characterised by fragile financial systems, high public deficits and debt, and interest rates close to zero -- provides ground for self-perpetuating pessimism and the propagation of adverse shocks, the most critical of which is a worsening of the crisis in the euro area," it says.
"On the financial front, moving toward a model of common supervision, resolution, and deposit insurance will strengthen and unify the euro area."
Even if such financial contagion were weaker than that which followed the collapse of Lehman Brothers in 2008, global output would fall by about 2pc from the latest forecasts.
These see global growth of 3.25pc this year, down from the previous forecast of 4pc three months ago. The forecast for the eurozone was slashed to a 0.5pc fall in output of goods and services (GDP), compared with its previous 1.1pc growth.
It explicitly backs the controversial idea of eurobonds for the first time, where some borrowing would be done by all members together, although this should be accompanied by stronger fiscal discipline or centralisation.
"The world recovery, which was weak in the first place, is in danger of stalling," IMF chief economist Olivier Blanchard said.
The IMF urges that countries including the United States and the more stable euro economies should continue to support growth through borrowing and easy monetary conditions.
In its accompanying Fiscal Monitor, the IMF notes that, despite appearances, Ireland is not imposing severe austerity and is cutting its underlying deficit slowly.
This deficit, which attempts to include the effects of the downturn, fell by 2pc of GDP last year, compared with 3pc in Greece and 4pc in Portugal, and is due to decline by 0.7pc of GDP this year.