By Simon Miller

The European Commission is to approve the latest €1bn (£0.81bn) tranche of bailout money to Ireland following its seventh quarterly review of the county.

In the report, the EC said the Irish economy continued to develop in line with expectations although it warned that "downside risks have increased, reflecting primarily growing headwinds in main trading partners".

The report found that GDP growth forecast was kept broadly unchanged for 2012 (slightly down from 0.5% to 0.4%) but had been revised down more appreciably for 2013 from 1.9% to 1.4%.

Ireland has also kept its austerity programme remaining strong overall with the central government cash deficit in the first half of 12012 below expectations thanks to better-than-expected revenue.

"Some expenditure overruns were however, recorded, mostly on welfare payments and in the health area, and the authorities have agreed to take corrective steps in the remainder of the year," the report added.

Although the report said that there had been further progress towards a healthier and more focused financial sector, an overarching challenged continued to be presented by "domestic banks' weak profitability reflecting still-growing non-performing loans, a high overall cost of funding, low margins on new business and low-yielding legacy loans, and one-off costs for operational restructuring".

It added: "Looking ahead, banks need to continue working on their restructuring plans and effectively implement their arrears resolution strategies (extending recent efforts on mortgages to their SME loan portfolios."

It added: "The authorities are also actively exploring options for a gradual phasing out of the Eligible Liabilities Guarantee scheme, which weighs heavily on banks' profitability."

The report concluded: "Despite the substantial progress made so far, the programme's ultimate success remains subject to important risks, including continued uncertainties in the outlook for trading partners' growth and the complexity of the ongoing financial sector reforms."

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