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IMF Warns Policy Slippages May Pose Downside Risk To Italy

IMF Warns Policy Slippages May Pose Downside Risk To Italy
7/4/2013 11:24 PM ET

The International Monetary Fund has warned that possible policy slippages, including at the European level, may pose downside risk to Italy's economic outlook and could undermine market confidence in the sovereign.

Any backtracking on the policy could also intensify funding pressures on the banks and tighten credit, the Washington-based lender said in a regular review report on Thursday.

"The risks to the outlook are tilted to the downside," IMF said adding that a prolonged recession would further increase banks' nonperforming loans, especially for the weak SME and construction sectors.

This could, in turn, trigger concerns about the country's fiscal position, the report said. Outside Italy, a slowdown in the emerging market economies or market turmoil could jeopardize an export-led recovery and push up sovereign and private interest rates, it added.

IMF downgraded its gross domestic product forecast for Italy this year and now expects the economy to contract 1.8 percent compared with the April forecast of 1.5 percent contraction. The economy is seen expanding 0.7 percent in 2104, stronger than its previous prediction of 0.5 percent.

IMF urged Italy to press ahead with reforms, particularly in product markets, public services as well as in the justice system. The authorities should act on Italy's low employment, particularly among youth and women, the Fund said.

The lender said Italy will meet its budget deficit target for this year after a sizable adjustment program last year. However, still the country's public debt ratio is projected to be significantly higher than a year ago, primarily due to the weak economy and also the clearance of public arrears, the report noted.

It urged the government to quickly enact measures to support growth, by rebalancing the composition of adjustment towards expenditure cuts and lower taxes.

Italy needs stronger budget institutions and binding multi-year expenditure ceilings to enhance the credibility of the fiscal anchor, the report added.

by RTT Staff Writer

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