Euro zone's Ireland gets green light for bailout exit

* Lenders to give bailed-out country go-ahead to exit

* No decision on precautionary line when aid ends

* Much-needed austerity success for EU, limited parallels

By Sam Cage and Padraic Halpin

DUBLIN, Nov 7 (Reuters) - Three years after going cap in

hand to international lenders, Ireland got the green light on

Thursday to step out on its own as the first euro zone country

to exit its bailout programme.

The European Commission, European Central Bank and

International Monetary Fund signed off on the last part of the

85 billion euro ($114 billion) aid programme, paving the way for

Ireland - which has met all major targets - to complete it by

the end of the year.

It is a much-needed success story for Brussels, which needs

to show its austerity medicine works, but may not be a precedent

for other bailed out euro zone states as Ireland had few of the

structural problems facing Greece or Portugal.

"This is a significant day that many thought, and some

feared, would never be reached," Noonan told reporters. "There

are difficulties and we will continue, but the responsibility is

being passed back now to the Irish government."

The main issue remaining is whether the government will take

out an insurance policy of asking for a precautionary credit

line when the bailout ends. It has indicated it may go it alone

as it has funding into 2015 and Finance Minister Michael Noonan

said it was still an "open question".

Speaking in Frankfurt, ECB President Mario Draghi said the

decision lay in Dublin's hands although he believed prudence was

in order.

"The ECB and in general the other institutions, the IMF and

the Commission, would say that certainly it would be useful to

have a precautionary programme in place," he told a news

conference.

"But it's also true that the success has been quite

significant so it's up to the Irish authorities to decide what

they want to do and we certainly wouldn't want to interfere."

BOOM TO BUST AND BACK?

The country of 4.6 million has endured five years of

austerity with little of the unrest that has rocked Greece and

Spain since the burst of the "Celtic Tiger" property boom. That

had forced the state to rescue wrecked banks and resulting debts

pushed it to seek aid from its EU partners in 2010.

Officials from the lenders, known as the "troika", became

almost part of the furniture in the upscale hotels around

Dublin's government buildings.

"We built up good personal relationships and they kind of

became honorary Irish people, they worked above and beyond the

call of duty in the interests of Ireland," Noonan said.

The government has regained some market access - highlighted

by a 10-year bond issue in March - and borrowing costs have

fallen steadily from a 2011 peak. But forgoing a precautionary

line could leave it vulnerable to market shocks and unable to

access the ECB's government bond purchases scheme.

Noonan said there was still no decision on the credit line

and it would be taken before the formal exit date of Dec. 15.CHALLENGES AHEAD

The Irish economy pulled out of recession in the second

quarter of this year but still faces challenges, with

unemployment above 13 percent and spending depressed by salary

cuts and tax hikes. House prices are still nearly 50 percent

below their 2007 peak, though have begun to pick up in Dublin.

Government forecasts show Ireland needs to expand by an

annual 2-3 percent annually to make its debt sustainable but it

expects just 0.2 percent growth this year and barely 2 percent

next.

"I don't think people will be breaking out the champagne

tonight when they've got property tax bills coming in the

letterbox. It's still pretty tough out there," said James

Herlihy, a financial services worker in his late 30s.

Concerns also persist over the health of Ireland's banks and

the lenders are reviewing the quality of their assets - an

exercise conducted in advance of Europe-wide stress tests next

year - before giving the final all clear to exit the bailout.

The IMF mission chief for Ireland, Craig Beaumont, said

Irish banks were making good progress albeit with significant

work still ahead and the most important challenge ahead is the

high level of unemployment.

"My message is that Ireland's programme will become an

example that we will learn from in the future," Beaumont said.