Italy, under fierce pressure from financial markets and European peers, has agreed to have the IMF and the EU monitor its progress with long delayed reforms of pensions, labor markets and privatization, senior EU sources said on Friday.
Italian Prime Minister Silvio Berlusconi agreed to the step in late-night talks with eurozone leaders and US President Barack Obama on the sidelines of a G20 summit in Cannes, France.
The Italian move came after Greece stepped back from a proposed referendum that could have triggered its exit from the euro area and agreed to seek national consensus in support of a 130 billion euro (US$178 billion) new bailout program.
“We need to make sure there is credibility with Italy’s targets — that it is going to meet them. We decided to have the IMF involved on the monitoring, using their own methodology, and the Italians say they can live with that,” one EU source said.
“Italy has no problem with surveillance at all, even with the IMF being involved,” he said, adding that the European Commission and the IMF would each report separately on how Italy was meeting its targets.
The leaders of France, Germany, Italy, Spain, the European Central Bank, the IMF and EU institutions also discussed with Obama ways of ramping up the IMF’s warchest to help prevent contagion from the eurozone’s debt crisis plunging the world back into recession.
The concession by Berlusconi was an attempt to shore up his country’s perilous position on bond markets, where its borrowing costs soared well above 6 percent this week, raising doubts about its long-term ability to cope with a debt pile of 120 percent of gross domestic product.
An official Italian source denied that Italy was being singled out for special surveillance and said the whole eurozone would be under closer monitoring. However, he confirmed that Rome was willing to request IMF advice on implementing the commitments it gave EU leaders on specific reforms on Oct. 27.
The EU source said a precautionary credit line was not seen as a credible option for Italy, where one of the main problems has been market confidence.
Analysts are eyeing Italy as a test case for the anti-crisis package agreed in Brussels last week.
“Italy holds the key to the euro zone debt crisis,” BNP Paribas analyst Luigi Speranza wrote in a research note late on Thursday.
“Developments in Italy are a crucial test for the credibility of the anti-crisis framework set up by the EU,” he wrote.
Concern is growing that Italy, the euro area’s No. 3 economy and biggest government bond market, could go the way of Greece and require a bailout without rapid action.
Berlusconi has repeatedly promised to make deep reforms, balance the budget in 2013 and trim the public debt, but there are doubts about his commitment.