IMF warns Italy 'vulnerable' despite Monti efforts

The IMF warned Tuesday that Italy's economy remained "vulnerable" to the euro debt crisis and could have a knock-on effect globally despite "strong efforts" being made by Prime Minister Mario Monti. The International Monetary Fund said it expected a recovery to "take hold" only at the start of next year with a rise in exports but said growth rates would continue to lag behind the rest of the eurozone without major reforms. It also said that Italian banks were broadly stable but still heavily reliant on liquidity from the European Central Bank and that lenders were becoming too exposed to sovereign risk and rising loan rates. While the IMF kept its economic growth forecasts at minus 1.9 percent for this year and minus 0.3 percent in 2013, it said Italy's debt would rise to 125.8 percent of gross domestic product this year and that the deficit would decline only to 2.6 percent. But the Fund also said that Italy's primary surplus would rise to more than 4.0 percent of GDP by 2014 -- the highest level in the eurozone. "The authorities have embarked on an ambitious agenda to secure sustainability and promote growth," the IMF said in an annual report. "Despite these strong efforts, Italy remains vulnerable to contagion from the euro area crisis, with spillover consequences for the region and globally." The report stressed the importance of keeping up the reform momentum with continued public support for Monti, whose popularity ratings have dipped but remain relatively high as budget cuts have taken holds. "The key will be forceful and expeditious implementation of these reforms. To the extent that public support weakens then this will become more challenging," said Kenneth Kang, the head of the IMF's mission to Italy. "Public support is still there and it is important that it remains there." The IMF also urged Italy to cut spending and lower taxes in the medium-term and to implement structural reforms like overhauling the labour market, introducing laws that made it easier to do business and boost competition in the service sector. The Fund hailed a new constitutional balanced budget law as "an important tool for strengthening fiscal discipline and policymaking" and praised former European commissioner Monti's efforts to curb public finances in the short term. The report said banks had strengthened their capital positions but cautioned that they were at risk from the recession and financial market pressures. Impaired loans in Italy have risen to 11 percent of the total in 2011, from less than six percent before the crisis. Banks' holdings of government bonds have also grown to seven percent of assets compared with a four-percent eurozone average. Foreign holdings of Italian bonds have meanwhile decreased from around 51 percent last year to an estimated 37 percent now, the report said. The IMF forecast that Italy's debt-to-GDP ratio will peak at about 126.4 percent in 2013 before declining to 119 percent in 2017 but warned that a slow recovery, high interest rates or policy slippage could push debt even higher.