Italy's economic woes worsen as IMF forecasts slowdown

If the Brexit wasn't bad enough for Europe already, the International Monetary Fund (IMF) on Tuesday warned that Italy – the eurozone's third largest economy – faces tough years ahead.

The country's economic growth is going to be slower than what the IMF had forecast a couple of months back, and it would take nine more years for Italy to take its economic output to the level of 2008, the IMF said.

Italy's banks carry billions of dollars of bad loans and this could aggravate as more businesses face difficulty in paying off their debt in a sluggish economy.

In its latest report, the IMF said Italy's economy will grow by less than one percent this year and only marginally faster in 2017. At end of May projections were for 1.1 percent growth this year and 1.25 percent in 2017.

"The authorities thus face a monumental challenge. The recovery needs to be strengthened to reduce high unemployment faster and buffers need to be built, including by repairing strained bank balance sheets and decisively lowering the very high public debt," the report said.

Italy will struggle to close the gap with its peers even if recent reforms are fully implemented, it said

Banks in trouble

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 IMF said.

The poor asset quality of Italian banks could snowball into wider problems for global economy if immediate steps are not taken, the report added.

"If downside risks were to materialize, regional and global spillovers could be significant given Italy's systemic weight."

But using public money to bailout banks is a controversial subject in the EU.

According to Vox, Italian Prime Minister Matteo Renzi wants to pump $45 billion in the banks. On the other hand, EU rules restrict such a bailout before investors in the banks are made to pay.

In Italy's case, most of those investors are ordinary Italians.

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.

"There are issues of non-performing loans in Italian banks, but that's not a new issue," he said.

However, the IMF sees a possibility of a rescue.

If EU-wide stress tests show that financial stability is at risk, there is scope for Italy to use public money to recapitalize its banks, the head of the IMF's mission to Italy, Rishi Goyal, said.

To what extent this could be done without triggering losses to investors under newly adopted "bail-in" rules would depend on negotiations between Italy and the EU, he said.