IMF says Italy's recovery fragile, needs 'bold, quick' reforms

ROME (Reuters) - Italy's economic recovery remains fragile and Matteo Renzi's government needs to take rapid steps to increase the country's growth potential and cut debt, the International Monetary Fund said on Tuesday.

In its written conclusions after a visit to Italy, the IMF called on the government to tighten the budget to achieve a modest fiscal surplus next year in structural terms and urged Italian banks to step up efforts to reduce bad loans.

"The recovery remains fragile and unemployment unacceptably high, highlighting the need for bold and quick policy actions," the IMF said in the document.

Italy's economy contracted by 0.1 percent in the first quarter after emerging at the end of 2013 from a two-year recession.

Renzi, who replaced party rival Enrico Letta as prime minister in February, has promised a raft of reforms to overhaul the euro zone's third-biggest economy and its political system but little of his ambitious agenda has been implemented so far.

He is seeking budget flexibility from the European Union in order to be able to spend more on investments to re-generate the economy, which has been sluggish for more than a decade and is struggling with high unemployment above 12 percent.

The government currently forecasts the budget deficit to fall to 2.6 percent of economic output this year after coming in bang on the EU's ceiling of 3 percent in both 2012 and 2013.

In structural terms, adjusted for the effects of the business cycle, the government forecasts a deficit of 0.6 percent of gross domestic product this year and 0.1 percent in 2015.

The IMF called for more ambitious consolidation, saying "a modest structural surplus next year would be appropriate to bring down debt faster - this would be best achieved smoothly to avoid large adjustment."

It also called on Italy to reform its labour market, saying that the introduction of contracts offering gradually increasing job protection would be fairer than the current setup divided between highly protective permanent contracts and temporary contracts offering little or no rights to workers.

(Reporting by Steve Scherer and Giuseppe Fonte, writing by Gavin Jones; Editing by Susan Fenton)