IRELAND MAY be in for a longer period of austerity then expected, as attempts reduce the State’s debt to more manageable proportions may require ongoing fiscal discipline, rating agency Fitch said in a report yesterday.

Fitch expects Irish debt to peak at 116 per cent of gross domestic product in 2013-14, but noted that this would reduce the State’s flexibility to deal with future shocks and crises, which may require further cutbacks.

“There will also be little fiscal space to absorb the cost of ageing populations, implying that fiscal discipline will need to be maintained over several years to bring public debt down to safer levels,” the rating agency said.

Describing the Irish economy’s solvency as “fragile”, Fitch said reducing the debt-GDP ratio was vital to restoring confidence in the State’s fiscal management. “Significant threats to . . . recovery and fiscal consolidation remain. Ireland’s debt dynamics are very sensitive to growth . . . Further consolidation measures could well be needed if growth continues to underperform,” the agency said.

While confident that the debt- GDP ratio would be stabilised, Fitch nonetheless advanced a possibility whereby if GDP continued to contract in 2011, the debt-GDP ratio would reach 128 per cent by 2015 and would stay at that level if there was no policy response.

Due to the predetermined cost of funding under the IMF-EU programme, interest rates would have a much more muted effect on the debt dynamics over the medium term, it noted.

However, Fitch also suggested that if interest rates on Irish borrowing remained high once this deal expired, debt-GDP would stabilise at 109 per cent in 2020 and not fall further.

However, Fitch also asserted that there was significant upside risk to Ireland’s debt sustainability and that it was “not unreasonable” for a long-term trend growth assumption of 3 per cent to lead debt-GDP to fall to 87 per cent by 2020, provided the IMF plan was carried out.