The IMF 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 percent of GDP by next year and close to zero by 2014.
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 next year.
“[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 about 120 percent of GDP and is stuck with one of the world’s lowest -economic growth rates.
The IMF said without fiscal adjustments beyond next year, 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 percent on Tuesday, their highest in more than a decade.
The fund warned that if market concerns worsened, it would hurt 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 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 percent this year, down from 1.3 percent last year, compared with the eurozone average of 1.7 percent expansion.
Meanwhile, Spanish lawmakers have voted for a budget cap for next year that cuts spending by 3.8 percent, sending a message of austerity at a time of deep concern over eurozone sovereign debts.
The cap, agreed late on Tuesday, is only the first step in drawing up the budget, but it reinforces Madrid’s argument that it is doing the hard work of cutting spending and reforming the economy.
Lawmakers in the lower house passed the cap by 170-145 votes, with the governing Socialists in favor, the conservative opposition Popular Party and some leftist groups against, and 18 abstentions.
The cap must still be approved by the Senate.
Under the agreement, public spending next year may not exceed 117.353 billion euros (US$165 billion), 3.8 percent less than this year’s budget, which was already 7.7 percent less than last year’s.
The government has vowed to cut the public deficit from 9.24 percent of GDP last year to 6 percent of GDP this year, 4.4 percent next year and 3 percent in 2013.
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