Brian Cowen's government faces unprecedented problems
Ireland faces the worst recession in the developed world and a struggle to bail out its banks, the International Monetary Fund has forecast.
The Washington-based institution said the government of Brian Cowen was adopting the right tactics to get the country back on course.
However the IMF said the Irish government is not pessimistic enough about its immediate prospects.
It said Ireland should expect to see its economy shrink by 8.5% this year.
It said that unemployment will rise from the current 11.8% to 15.5% next year.
The IMF report also warned that Irish banks faced staggering losses of 35bn euros by next year.
All those figures are worse than the projections of the government, which is trying to raise taxes and cut spending to combat a growing budget deficit.
It is also founding a new "bad bank" that will buy an estimated 90bn euros in bad property loans at a discount.
Finance Minister Brian Lenihan said he welcomed the report as "a balanced and realistic assessment of the challenges we face which also endorses the actions that we are taking."
The IMF's senior official for Ireland, Ashoka Mody, said he remained confident that Ireland would not default on its debt obligations - but faced a long, hard slog to defend its banks and bring spending back into line with a drastically reduced tax intake.
"The Irish economy is in the midst of an unprecedented economic correction," said the report, which was based on extensive discussions between IMF experts and Mr Lenihan's Department of Finance.
Ireland's construction industry is in a deep recession
"The stress exceeds that being faced currently by any other advanced economy and matches episodes of the most severe economic distress in post-World War II history."
The report said Ireland could not count on attracting a new wave of foreign investment, its recipe for success during the heady Celtic Tiger years of 1994-2007.
It said Ireland today was the most expensive in the euro zone, and the government faced years of confronting unions over the need to cut public sector wages.
It also appealed to Ireland to cut welfare benefits, which would be politically difficult.
The fund's experts also cautioned Ireland that despite setting up the "bad bank", to be called the National Assets Management Agency (NAMA), it might ultimately be forced to nationalise either of the two dominant banks.
It argued that NAMA would find it difficult to determine fair prices for the defaulting property portfolios of the banks - and if it paid too much, taxpayers would unfairly carry the burden of the banks' bad decisions.
Towards the end of its boom years, the Irish economy grew increasingly dependent on construction and property speculation.
The tax revenues from those sectors disappeared when the property bubble spectacularly burst last year in response to the global credit crunch.