Political Tensions May Harm Italy’s Economic Recovery, IMF Says

Disputes in Prime Minister Enrico Letta’s coalition may hinder investor confidence in Italy and jepopardize its return to growth from the longest slump since World War II, the International Monetary Fund said.

“Tensions between the coalition partners are apparent and represent a key risk to the economic outlook,” the Washington-based lender said today in a report. “Loss of market confidence could be significant and push Italy into a self-reinforcing bad equilibrium and protracted period of slow growth.”

The IMF reiterated forecasts published on July 4 of an economic contraction of 1.8 percent this year and 0.7 percent expansion in 2014. Letta’s budget plan last week saw gross domestic product falling 1.7 percent in 2013 and rising 1 percent next year. The government also expects the country’s two-year recession to end in the fourth quarter.

Italy’s ability to boost its growth potential may strengthen with the implementation of comprehensive reforms and other measures including the program of arrears payments to private companies, today’s report said.

Still, progress may be hampered by bickering between the parties in Letta’s over the fate of former premier Silvio Berlusconi, whose People of Liberty party has threatened to topple the government if he is expelled from the Senate. Letta’s Democratic Party is seeking to strip Berlusconi of his Senate seat after he was convicted of tax fraud in August.

Rating Risk

“An unstable coalition” may lead “to policy slippages, stalling of structural and fiscal reforms, or rating downgrades,” today’s report said.

Italy’s credit rating was lowered to BBB, or two levels above junk, on July 10 by Standard & Poor’s, which cited a weakening of economic prospects. In March, Fitch Ratings downgraded Italy’s long-term debt to BBB+ from A- with a negative outlook. Moody’s Investors Service cut the nation’s credit rating by two steps to BAA2 in July last year.

Italy needs to reduce its public debt, which at about 130 percent of GDP is Europe’s second biggest, and should consider the sale of state assets, today’s report said. The IMF forecasts the deficit will widen to 3.2 percent of GDP this year. That’s more than the government’s 3.1 percent estimate and 0.2 percent above the European Union limit.

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