Ireland's extensive support for its banks has been vital to maintaining financial stability, the International Monetary Fund said on Thursday, as ratings agencies praised decisions taken by the country's bad bank this week.

An IMF spokesman said the first transfer of assets from banks to Ireland's bad bank represented an important step in the country's recovery, while ratings firms said it made the course the government's debt will take clearer.

The government should now be restoring the financial health of the banking system which is an absolutely necessary prior condition for restoring economic growth and stability, Chris Pryce, director for ratings in Western Europe for Fitch Ratings, told Reuters in an interview.

He said Fitch's AA- rating on Ireland with a stable outlook was increasingly proving to be appropriate, and that recent decisions had not changed that outlook.

Fellow ratings firm Moody's said it was closer to deciding the level in the Aa range where Ireland's rating would settle, describing the bad bank's impact on its AA1 mark on negative outlook as a balancing act dependent on economic recovery.

Fitch's Pryce added that it was absolutely essential Dublin continued to aggressively follow its program of budgetary cuts which have helped Ireland to win back investor confidence compared with other heavily-indebted euro zone members.

Ireland's bad bank, the National Asset Management Agency (NAMA), this week started buying property loans from banks at a higher discount than expected and Dublin told participants to find up to 32 billion euros ($43.16 billion) of capital to make up for the writedowns.

Central bank Governor Patrick Honohan lowered the estimated amount NAMA would pay for property loans, saying in an article in the Financial Times on Thursday it would spend between 40 billion euros and 50 billion euros, below the government's initial 54 billion euro projection.

The bigger capital shortfalls arising from higher discounts will ultimately hit government coffers, which are under close scrutiny as Dublin attempts to cut its large budget deficit.

The state will have to supply extra capital to nationalized Anglo Irish Bank, two building societies and possibly to Allied Irish Banks . Bank of Ireland is potentially the only participant that will avoid majority state ownership.

INVESTIGATION

Honohan reiterated the banks would sell non-core assets and issue new shares, and the government's preference shares from an earlier bailout would be converted into ordinary equity.

As in the case of bailed-out British banks Lloyds and Royal Bank of Scotland , Irish banks will be managed with a view to get the best value for the taxpayer when the equity stakes are sold back into the private sector, he said.

The government has injected 12 billion euros into nationalized Anglo Irish Bank , and has said another 10 billion could be needed. Honohan said it was likely the additional amount would be necessary.

This is a truly shocking figure, albeit one affordable for the state, Honohan said. Fitch said Anglo's woes would not make much difference to Ireland's overall sovereign rating.

The public's anger over the size of the injections has been growing, and ministers said they understood people's reactions as a small number protested outside Anglo's head office on Thursday.

We are all appalled by what has happened at Anglo Irish Bank, Deputy Prime Minister Mary Coughlan told parliament.

Anglo posted a 12.7 billion euro loss on Wednesday, the largest in Irish corporate history; police arrested and later released its former chairman Sean FitzPatrick last month as part of a fraud investigation into events preceding the bank's nationalization.

I have full confidence in the garda (police) investigation that has been taking place, where there has been considerable progress, it has been most focused and vigorous, Coughlan said.

($1=.7414 Euro)

(Additional reporting by Lesley Wroughton in Washington; Editing by Karen Foster and Rupert Winchester)

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