May 26, 2010 / 6:10 PM / 9 years ago

UPDATE 1-IMF praises Italy's cuts, points to wage bill

* Italy aims to cut deficit to 2.7 pct of GDP by 2012

* Goals now are discipline, debt burden and growth - IMF (Adds details, quotes)

WASHINGTON, May 26 (Reuters) - The International Monetary Fund on Wednesday welcomed Italy’s commitment to reduce its fiscal deficit and said containing the public wage bill should be the focus of cost-cutting measures.

As investors and governments fret over the broader effects of Greece’s debt crisis, the IMF strongly commended measures adopted by Italy’s cabinet late on Tuesday to cut the fiscal deficit to 2.7 percent of gross domestic product by 2012.

Italy’s deficit was 5.3 percent of GDP in 2009 — well below the EU average — and public debt rose to about 115.8 percent of GDP by the end of 2009, the IMF said. The fiscal deficit is projected at 5.2 percent of GDP in 2010.

“The overarching policy goals now should be to maintain fiscal discipline, reduce the burden of public debt, and raise the economy’s long-term growth rate,” the IMF said in its annual review of Italy’s economy.

The outcome of the IMF review came as Prime Minister Silvio Berlusconi defended his government's 24 billion euro ($29.4 billion) austerity package that targets public workers, saying sacrifices were needed to save the euro EUR=. [ID:nLDE64P1HB]

Italy, along with Portugal and Spain, have introduced deeper budget cuts to try to fend off contagion from the Greek debt crisis. [ID:nLDE64O0R1]

The IMF said Italy’s economy was set for a gradual recovery but warned that its banks may face a number of challenges due to weak growth and market turbulence in the euro area.

Italian authorities should encourage banks to strengthen capital, while reforms were needed to boost productivity and reduce the high cost of doing business, the IMF said. (Reporting by Lesley Wroughton; Editing by John O’Callaghan)

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