The International Monetary Fund called on Tuesday for “decisive implementation” by Italy to cut its public debt, as the country sought this week to calm market worries about the sustainability of its debt burden. In its annual review of the Italian economy, the IMF welcomed plans by the government to reduce the fiscal deficit to below 3 per cent of GDP by 2012 and close to zero by 2014.
But IMF expressed concern that the authorities’ adjustment plan appeared optimistic on the growth effect of the envisaged fiscal consolidation. It also said the plan called for across-the-board cuts, which are difficult to sustain, and failed to give no specifics on how consolidation would be achieved beyond 2012. “(IMF) directors stressed that decisive implementation of the package is key and a number of them felt that more front-loaded spending measures would have a positive effect on market sentiments,” the IMF review said, noting that needed tax reform plans lacked details. Italy has struggled to keep its public debt down to some 120 per cent of GDP and is stuck with one of the world’s lowest economic growth rates.
The IMF said without fiscal adjustments beyond 2012, debt could stay over 100 percent of GDP in the long term. With the Greek debt crisis intensifying, market fears have now turned to other highly-indebted countries such as Italy. Italian 10-year bond yields rose past 6 per cent on Tuesday, their highest in more than a decade. The Fund warned that if market concerns worsened, it would hurt the balance sheets of Italian banks and insurance companies, while tighter credit conditions and uncertainty would dampen investment and weigh on consumption.
The IMF said that, while the Italian economy was set for an export-led “modest recovery,” growth would likely remain constrained by weak domestic demand and further spending cuts. It forecast Italian growth would reach 1.0 percent this year, down from 1.3 per cent in 2010, compared with the euro zone average of 1.7 per cent expansion. An IMF staff paper said Italian authorities agreed with their assessment on the pace of recovery but were more optimistic over the medium term. The IMF urged policies should focus on spending cuts to reduce the debt load, maintain financial sector stability and boost economic growth.
“Given the high level of public debt and the current market turbulence, fiscal discipline is a prerequisite for growth,” IMF staff report said, adding. “Only sustained growth will reduce the burden of public debt.” The Fund said it was “encouraged” by government plans to undertake a comprehensive review of public expenditure and that containing the pubic sector wage bill within broader reform measures would be helpful. It commended the government’s call for bank capital increases and urged swift completion of the recapitalization plan.
