The International Monetary Fund on Wednesday said that the Italian economy may contract this year, while renewed tensions in euro area are adding to downside risks to the economy's prospects.
The economy may contract this year due to strong headwinds from fiscal consolidation, tight financial conditions, and the global slowdown, the IMF mission to Rome warned. However, it expects economic activity to recover in early 2013.
Renewed financial turmoil could push government bond yields higher, tighten bank credit, and weaken activity, IMF warned and also noted that the slow progress in implementing needed fiscal and structural reforms could undermine confidence and raise concerns about Italy's fiscal position.
At the same time, the mission praised Italy for its fiscal reform efforts and said the government has enacted an impressive fiscal package to improve the primary surplus.
The report suggested that the government should pass the labor market reform bill quickly to reduce uncertainty and encourage new hires.
The global markets are currently reeling under lingering uncertainty over Greece's exit from Eurozone.
IMF Managing Director Christine Lagarde warned that the consequences of a Greek exit from the Eurozone would be "extremely expensive."
Another official to voice concern over the possible Greek exit was the World Bank's outgoing President Robert Zoellick.
"The core question will be not Greece, but Spain and Italy," he said in Washington on Wednesday. A Greece exit would have "very damaging" ripple effects, reminiscent of the Lehman Brothers collapse in 2008," Zoellick said.
by RTT Staff Writer
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