IMF pushes Italy to take

13th July 2011

The IMF welcomed plans by the government to reduce the fiscal deficit to below 3pc of gross domestic product by 2012 and close to zero by 2014 as it conducted its annual review of the Italian economy, said the report.

However, the 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.

The review said: "(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."

Italy has struggled to keep its public debt down to some 120% of gross domestic product. As the Greek debt crisis grows, markets have turned to other problem countries with hefty debt such as Italy, say reports today. 

The IMF said without fiscal adjustments beyond 2012, debt could stay over 100% of GDP in the long term.

The Times reports that this week's sudden outbreak of panic in the Italian bond market, which had previously seemed immune from the crisis, signals the choice between a full-scale political union and the disintegration of the euro is becoming impossible to postpone much longer.

What makes Italy's role even more decisive is the vast size of its bond market and its national debt. Italy's bond market is the third largest in the world, after the US and Japan, and far larger than those of Germany or France. If Italian investors started selling in earnest, the tide of money out of the country would overwhelm the ability of the German or French governments to intervene.

Another report in the Daily Telegraph says that the European Union has reached "crunch time" – in the words of George Papandreou, Greece's despondent premier. Its leaders can no longer allow themselves the luxury of "indecisiveness, errors and tactical politics" as the debt crisis engulfs 40% of the eurozone's economy and almost half its population.

Willem Buiter, Citigroup's chief economist, said in the Times report that the survival of monetary union now depends on the Spartan fortitude of the ECB, preferably before Italy's crucial bond auction on Thursday. "Nothing stands in the way of multiple sovereign defaults except the ECB: they are the only game in town, there is nothing else," he said. "Contagion has spread from the periphery to the soft core. That is a game-changer. It is existential for Euroland and, indeed, for the EU."

To receive our free email newsletter sign up here.

Leave a Reply

Your email address will not be published. Required fields are marked *