The International Monetary Fund (IMF) has called on Italy to launch urgently needed economic reforms to accelerated anemic growth and head off a looming crisis in its financial industry.
In its Italy report released on Tuesday, the International Monetary Fund said economic growth in the eurozone’s third-largest economy wasn’t expected to return to the levels seen before the 2008 financial crisis until the mid-2020s.
Implying “two lost decades” for Italy, the Washington-based crisis lender noted that other economies in the euro currency area would have grown 20 percent to 25 percent larger by then.
The IMF also cut its growth estimate for the country, expecting gross domestic product (GDP) to expand by less than one percent in 2016 from an earlier forecast of 1.1 percent. Growth for 2017 would also come in lower than expected – about one percent instead of 1.25 percent, the IMF said.
Fragile recovery weighs on banking sector
In 2015, Italy recovered from three years of recession – its longest since World War Two – growing by 0.8 percent. The economic downturn has caused unemployment to soar to 11 percent and dragged down the country’s banks, which are laboring under a mountain of non-performing loans. However, the Fund sees light at the end of the tunnel.
“Italy is recovering from a protracted recession supported by accommodative monetary and fiscal policy, favorable commodity prices, and improved confidence on the back of the authorities’ wide-ranging reform efforts,” it wrote in the report.
Still it warned that “risks tilted to the downside,” including financial market volatility, the refugee surge, and headwinds from the slowdown in global trade.
Especially financial sector reforms were “critical to entrench financial stability and support the recovery.” Addressing the issue of bad loans totaling 360 billion euros ($397 billion) in Italian banks’ balance sheets, the IMF urged a speedier debt restructuring, more bank supervision and closer control of asset quality.
The IMF’s report lauded efforts by Italian Prime Minister Matteo Renzi to shore up banks with state bailouts. Renzi is currently negotiating with Brussels a plan to recapitalize banks with state funds – a move that is banned under EU rules adopted after the financial crisis and seeking to avoid that taxpayers pay for bank rescues.
Describing the challenges faced by Italy as “monumental,” the IMF said: “The recovery needs to be strengthened to reduce high unemployment faster and buffers need to be built, including by repairing strained bank balance sheets and decisively lowering the very high public debt.”
Italy has the highest level of public debt in the whole European Union after Greece. The IMF expects Rome to be able to lower its only marginally, from 132.9 percent of GDP in 2016 to 132.1 percent next year.
uhe/kd (AFP, dpa, IMF)