WASHINGTON (Reuters) ? The International Monetary Fund's oversight of Italy's efforts to tighten its budget should help buoy delayed economic reforms despite political instability, ideally buying a crucial reprieve with investors.
If the gambit doesn't work, the euro zone's third-largest economy will have little choice but to agree to a joint European Union-IMF bailout program.
With so much at stake, the IMF is set to send its new No. 2 official, former White House economic adviser David Lipton, to Rome in mid-November to begin the oversight process.
"It is noteworthy that IMF management has decided this is a very, very big deal and that David Lipton will lead the mission," said Ted Truman, a former U.S. Treasury official and a senior fellow at the Peterson Institute in Washington. "I know of no other recent case in which the first deputy managing director of the Fund has led a mission to a country."
Italian Prime Minister Silvio Berlusconi on Tuesday said he would step down, a move cheered by global stock markets hopeful it will open the door to more aggressive action to tackle the nation's debt problem.
Berlusconi effectively lost his ability to push through difficult reforms on pensions and labor markets after he failed to win a parliamentary majority in a budget vote.
But the formation of a new government alone is unlikely to lower borrowing costs, which have soared as concerns have grown that Italy would be the next domino to tumble in Europe's debt crisis.
The yield on the benchmark 10-year Italian bond has jumped to a 14-year high of 6.79 percent, close to the level that broke the back of Ireland and Portugal, both of which turned to the EU and the IMF for aid.
"Italy will not be out of the heat of bond markets until a solid and stable government actually implements austerity and undertakes reforms with strong credible leadership," said Jan Randolph, IHS Global Insight head of the Sovereign Risk Group, in London.
A MATTER OF CREDIBILITY
While Italy is solvent, sustained interest rates above 7 percent over several quarters, combined with stagnating economic growth, could turn the debt dynamics negative and ultimately push the country into insolvency, said Randolph.
IMF Managing Director Christine Lagarde told reporters at a summit of leaders from the Group of 20 nations last week that IMF oversight was one of the best ways "to have an independent view ... to verify that promised measures are actually implemented."
She said IMF monitors would publish findings at the end of every visit to Rome.
Truman, the former U.S. Treasury official, said, "The only way to contain this crisis is that the Italians need to deliver on a credible program on fiscal adjustment.
"Italians need to get on the stick to achieve a reasonable fiscal outcome and a more credible mechanism in case there is a run" by investors, he added.
Truman said it was important for Italy to regain market confidence and a "shadow IMF program," that does not involve any financial aid, would be helpful.
"The IMF has much more credibility in the markets vis-a-vis any of the European institutions," Truman said.
Domenico Lombardi, a former IMF board member for Italy who is now a senior fellow at the Brookings Institution in Washington, said the IMF and Italian authorities have always agreed on the need for reforms to boost the economy, but have faced political difficulties implementing them.
He said Italian authorities and the IMF would seek to agree on a timeline for economic reforms to be implemented. Italy would be under pressure to make the reforms to avoid public scolding by the IMF.
"Clearly this is an attempt to insulate the program of reforms from the intrinsic volatility of Italian politics," Lombardi said. "The Italians are well aware at a technical level what needs to be done, so the issue is political.
"The mere presence of the IMF," he said, "increases the chances that the reform agenda can be implemented."
(Reporting by Lesley Wroughton; Editing by Jan Paschal)
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