IMF urges Italy to take ‘decisive’ action on deficit

WASHINGTON: The International Monetary Fund (IMF) urged Rome to be decisive on cutting its deficit on Tuesday as investors dumped Italian bonds and the country's leaders rushed to pass a massive austerity plan.

Amid worries that Italy could follow Greece and Portugal into a financial maelstrom and require a bailout, the IMF praised Italy's reform programme that has already cut its current deficit to 4.5% of gross domestic product (GDP), down from 5.3%, in the past two years.

It also said the country had moved well to force banks to boost their capital strength.

But it said the government needed to move firmly to “rationalise” expenditures to set better priorities and make cuts even as growth has plummeted to a stagnant 0.1% per quarter on the back of low domestic demand and rising unemployment.

“While the economy has strengths, the public debt is high and growth is expected to remain constrained because of long-standing structural bottlenecks,” the Fund said.

In its periodic review of the Italian economy, the IMF board called the government's recent medium-term fiscal plan “an important step” toward cutting its deficit to below 3% of GDP by 2012 and almost zero by 2014.

But it suggested there was little room for error, given the testiness of markets for eurozone debt.

“The main downside risk comes from market turmoil in the euro area periphery,” the IMF said. “Another decade of stagnation also poses a major risk.”

The Italian government earlier this month announced a four-year austerity budget worth 40 billion euros in a bid to slash its deficit, as it faced worries about its ability to service a debt load that amounts to an extremely high 119% of GDP.

“Decisive implementation of the package is key,” the IMF said, suggesting that some accelerated spending measures might help quell the worries in the markets.

Meanwhile, the price of gold struck a record high to close at US$1,580 an ounce in London yesterday as investors flocked to the safe-haven precious metal on renewed tensions over the eurozone crisis, traders said. - AFP