“If incoming data shows economic growth continuing to pick up, labor market conditions continuing to strengthen, and inflation making progress toward 2 percent, then it likely would be appropriate to gradually increase the federal funds rate in the coming months”, according to a section that Chalk attributed to the Fed’s thinking when the IMF met with Yellen as well as with staffers in late May and early June.
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“While the economy should look better in second half of the year, growth will probably not be sufficiently fast, sufficiently rapid to be able to negate the outcome of the first and second quarters”.
“The authorities thus face a monumental challenge”.
“Risks are tilted to the downside”, it added, listing a raft of issues including the poor asset quality of Italy’s banks, financial market volatility and the impact of a global trade slowdown on exports.
Italy’s high public debt stands at 132.9% of GDP in 2016 and 132.1% in 2017 and is another “source of vulnerability”, the Fund reported.
Italy’s banks, which are saddled with some 360 billion euros ($397.55 billion) of bad loans and whose share prices have fallen by more than 50 percent this year, are a particular threat to the economic outlook, the International Monetary Fund said.
“A higher revenue and spending scenario of about three percent of GDP with the expeditious implementation of the 10-point reform agenda would raise the IMF’s baseline growth outlook of about six to seven percent to seven to eight percent range over the medium term”, noted Sumi.
“If downside risks were to materialize, regional and global spillovers could be significant given Italy’s systemic weight”.
Mr Dijsselbloem stressed the need for Euro states to respect the “strict” new rules which have been introduced to require creditors to take losses before public money can be put into banks.
In Italy’s case, most of those investors are ordinary Italians.
In Italian banks 18% of loans are classified as ‘non-performing’.
On Monday, Eurogroup President Jeroen Dijsselbloem, the leader of eurozone finance ministers, said he didn’t see the need for the banks to be bailed out.
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According to Rishi Goyal, the head of the IMF’s mission to Italy, the country might use public money to recapitalize its lenders in case the European Union stress tests reveal risks to financial stability.
