IMF fears possible Italy 'contagion' to weaker European economies

The International Monetary Fund (IMF) said Thursday it feared the consequences of a possible "contagion" of Italy's economic woes to European countries with "weaker macroeconomic fundamentals."

Noting the "four-year high" in Italian sovereign bond yields, the IMF said, "spillovers to other markets have been fairly contained."

"But there is appreciable uncertainty, and contagion from future stress could be notable, especially for economies with weaker macroeconomic fundamentals and limited policy buffers," the IMF said in its autumn forecast for Europe.

Italy is under massive pressure since the European Commission on October 23 rejected its 2019 budget in a historic move, giving the ruling populist coalition in Rome until November 13 to present changes.

Failing that, Brussels could put Italy into something called the "excess deficit procedure", a complicated process that could eventually lead to a fine of 0.2 per cent of the country's GDP.

The Italian government -- a coalition of the far-right League and the anti-establishment Five Star Movement -- plans to run a public deficit of 2.4 per cent of GDP, three times the target of its centre-left predecessor.

The coalition's 2019 budget is based on an estimate of annual growth of 1.5 per cent -- a figure considered optimistic by the IMF, which has forecast only one per cent, and the Commission, which expects 1.2 per cent.

Italian leaders insist the low growth rate is all the more reason to kickstart the economy through a spending spree, but Brussels fears the rising deficit could further feed Italy's exploding debt.

Italy already owes 2.3 trillion euros ($2.6 trillion), a sum equivalent to 131 per cent of its GDP. Even if Brussels fails to punish Rome, many assume the markets will.

Italy, as well as Turkey the IMF noted, "should prioritise measures that reduce fiscal deficits toward their medium-term targets and lower debt."