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OECD warns Italy to cut its heavy debt

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(Globalpost/GlobalPost)

Italy has taken important steps to correct its public finances but the country's new government must pursue reforms and cut its heavy debt, the OECD said Thursday as new Prime Minister Enrico Letta met with European leaders in Brussels.

The assessment by the Organisation for Economic Cooperation and Development came as Letta seeks allies across Europe for a stronger focus on growth and less pressure on fiscal discipline.

But "with the public debt-to-GDP ratio nearing 130 percent and a heavy debt redemption schedule, Italy remains exposed to sudden changes in financial market sentiment," an OECD economic survey warned.

"Large and sustained reductions in public debt are therefore the top fiscal priority," the report added.

It urged Letta to "consolidate" structural reforms launched by his predecessor Mario Monti and to come up with additional ways to boost growth and productivity, the weak points of the eurozone's third biggest economy.

"Fiscal measures should concentrate on spending restraint," the OECD report added.

Presenting the report in Rome, OECD Secretary-General Angel Gurria said Italy had an "enormous responsibility".

"There have been dangerous moments" when the country risked falling into the clutches of the eurozone debt crisis in 2011, "and it is for that reason that Italy must succeed, not only for Italy but for Europe, and with Europe, the world," he said.

The OECD said in the report that it did not expect a rapid reduction of Italy's debt load, forecasting that it would rise to 134 percent of gross domestic product (GDP) next year, and might increase further barring budget cuts or privatisations.

The previous Italian government forecast that public debt would peak at 130.4 percent of GDP this year and begin to decline after that.

EU countries are supposed to maintain public debt of no more than 60 percent of GDP.

As for growth, the OECD expected Italian business activity to decline by 1.5 percent this year before expanding by a slight 0.5 percent in 2014, owing largely to "poor competitiveness, a drop in bank lending and the immediate impact of public spending cuts and tax rises on households and businesses."

The organisation forecast that Italy's public deficit would stand at 3.3 percent of GDP this year and rise to 3.8 percent in 2014, which means it would remain above the nominal EU limit of 3.0 percent.

"Amid recession and rising unemployment it is sometimes difficult to see light at the end of the tunnel. But I am convinced that a commitment to the current reform strategy will result in better living standards and a stronger, more dynamic Italian economy," the report quoted Gurria as saying.

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http://www.globalpost.com/dispatch/news/afp/130502/oecd-warns-italy-cut-its-heavy-debt-0