IMF Urges Italy to Take Decisive Austerity Action

13 July 2011

Italy has been urged by the International Monetary Fund to introduce more austerity measures to bring down sovereign debt -- before it is too late.


Greece and Ireland have already -- swimming in debt -- been forced to go cap in hand to the EU and accept a joint bailout from the IMF and European Central Bank (ECB) to avoid going under. There are fears that Italy could be next as it has the second highest sovereign debt ratio in the region.


The Italian government has already faced a backlash in response to earlier attempts at austerity, and it is now "pressing ahead" with its program of spending cuts.


None the less, an IMF report said "decisive implementation of the package is key and the IMF feels that more front-loaded spending measures would have a positive effect on market sentiments."


Share prices in Europe are pretty miserable for fears that Italy will be pulled under next, and the Euro is also losing ground to many currencies.


This is where it gets worrying for Italy and the rest of us. As confidence wanes Italy is forced to offer higher yields on bonds (one of the ways countries borrow money) to get investors to bite, but the higher the yields they offer, the more pressure they put on public finances down the line. Eventually as we have seen in Greece and Ireland, it can get to the point where borrowing is too expensive, and the cycle of refinancing debt comes collapsing down.


In other news, credit rating agency Moody’s said there was increasing likelihood that Ireland may need a second bailout from the European Union and the IMF after it cut the country’s debt rating to junk status.

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