More reform needed, IMF warns Italy Italy runs the risk of sliding deeper into financial crisis in a "muddle-through" scenario of eurozone policies while facing political uncertainty after Mario Monti's technocrat government leaves office, the International Monetary Fund has warned. Releasing its annual report on Italy's progress following consultations and visits to Rome and Milan in May, the IMF concluded on Tuesday that Italy's structural reforms "go in the right direction, but more needs to be done." The fund highlighted Italy's "impressive" achievement in reducing its budget deficit, which puts it on track to record the eurozone's highest primary surplus in 2013 (before debt interest payments) of 4.2 per cent. However, it warned that risks to its outlook were "tilted to the downside, stemming mainly from an intensification of the euro area crisis." "Securing stability and reviving growth will require not only maintaining the momentum for reforms in Italy but also progress at the European level in strengthening the currency union," the report said. Dated June 21, its publication coincided with the first anniversary of the week when Italy was sucked into the sovereign debt crisis, its bond yields rising sharply. "A muddle-through scenario for policies in the euro area combined with a protracted period of low growth in the area as a whole could lead to an intensification of the crisis, pushing Italy back into a bad equilibrium, with higher sovereign yields, declining activity, and rising public debt reinforcing each other," the IMF warned. Noting that Italy accounts for 17 per cent of eurozone output and is the world's third-largest bond market, it added: "In a tail scenario of a significant increase in sovereign yields, doubts about Italy's fiscal outlook could have potentially large spillovers to the eurozone and the global economy." Turning to the political uncertainty over what path Italy will take after Mr Monti's mandate expires early next year, the IMF noted that broad public and parliamentary support for his government had weakened. Market analysts, it noted, were raising questions about the continuity of reforms beyond his term. Mr Monti made clear in Brussels on Tuesday that he had no intention of serving in another government after elections due by early next year. But he noted that he would remain a senator in parliament. His comments followed suggestions by some politicians that Mr Monti could remain as prime minister, possibly leading a grand coalition of the major parties. Aasim Husain, IMF deputy director of Europe, noted in a conference call that the government had passed three further measures since May, namely a decree to promote growth, labour reforms and €26bn of spending cuts over the next three years. "This [reform] process must continue forcefully and expeditiously if it is to succeed," he said. This is not a process of a week or months. Kenneth Kang, IMF Italy mission chief, said Mr Monti had enjoyed widespread public support since taking office last November. But he added: "If public support weakens as economic conditions weaken, this will become more challenging." Mr Kang said Italy had to cut public spending further to save money to reduce labour costs for the private sector. He said the IMF and Rome would discuss possible cuts in salaries for public sector workers to match local conditions. The IMF reiterated its forecasts for Italy of a 1.9 per cent fall in gross domestic product this year and a decline of 0.3 per cent in 2013, both significantly more negative than the government's own projections. Public debt is projected by the IMF to peak at 126.4 per cent of GDP in 2013 before falling to 119 per cent by 2017, "but will remain vulnerable to adverse shocks." The report also noted that foreign investors had sharply reduced their holdings of Italian sovereign bonds from 52 per cent of the total in 2010 to an estimated 36 per cent in March this year. This reduction had been offset by increased purchases by the European Central Bank and Italian banks but it said funding pressures would remain high with gross financing of €415bn - about 25 per cent of GDP - needed both in 2012 and 2013.