Bloomberg News

IMF Cuts Italy’s Growth Forecasts, Says Won’t Zero Deficit

September 20, 2011

(Updates with forecasts on deficit starting in first paragraph, chief economist’s comment in seventh, debt estimates in last.)

Sept. 20 (Bloomberg) -- The International Monetary Fund cut its forecast for Italian growth this year and next, saying the government will also miss its balanced budget goal in 2013.

Italy’s economy will grow 0.6 percent in 2011 and 0.3 percent in 2012, down from 1 percent and 1.3 percent forecast respectively in June, the Washington-based lender said in a report today. The IMF also projected the budget deficit to fall to 4 percent of gross domestic product this year and 2.4 percent next, before reaching 1.1 percent in 2013.

The government hasn’t revised its April 11 forecasts for an economic expansion of 1.1 percent this year and 1.3 percent in 2012. Finance Minister Giulio Tremonti said on Aug. 13 that he was sticking by those figures. The government is also targeting a balanced budget in 2013.

Weak economic growth was one reason cited by Standard & Poor’s last night when it cut Italy’s credit rating to A from A+, with negative outlook, the nation’s first downgrade in five years. S&P also said that the “fragile” government of Prime Minister Silvio Berlusconi and rising borrowing costs would make it difficult to reduce Europe’s second-biggest debt burden

Austerity Package

Italy’s government approved last month 54 billion euros ($74 billion) in deficit-cutting measures that convinced the European Central Bank to buy the nation’s bonds after borrowing costs surged to euro-era records. On Sept. 14, Parliament in Rome approved the austerity plan, the second in two months.

S&P said the raft of Italian spending cuts and tax increases would help damp growth in an economy shackled with “structural impediments” such as tightly regulated labor and services markets and an “inefficient public sector.”

Italy’s public-debt burden, the second largest in the euro region after Greece, will balloon to 121.1 percent of GDP this year and 121.4 percent in 2012, before falling to 118.4 percent in 2013, the IMF said today.

“If Italy implements these measures and is able to borrow at a relatively low rate, then we think debt in Italy is sustainable,” IMF Chief Economist Olivier Blanchard told reporters in Washington today. “But if for some reason the markets start believing that Italy’s debt is not sustainable and start asking for interest rates of 8, 9 or 10 percent, then it’s clear that Italy’s debt is not sustainable.”

--With assistance from Sandrine Rastello in Washington. Editors: Jeffrey Donovan, Andrew Davis

To contact the reporters on this story: Chiara Vasarri in Rome at vasarri@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net. Craig Stirling at cstirling1@bloomberg.net


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