IMF Fiscal Chief to be Italy’s First Budget Watchdog

His move is unlikely to cause a short-term fall in Italian bond yields. But longer term, Rome’s headhunting of the International Monetary Fund’s top budget expert, Carlo Cottarelli, could yield major sovereign-debt dividends.

The now-former Director of the Fiscal Affairs Department tendered his resignation at the IMF to be a budget watchdog for the Italian government, appointed as the country’s first Commissioner for Public Spending Review.

The position was created in August as part of Rome’s efforts to rein in a bloated budget and massive debt overhang, both of which have pushed borrowing costs up to perilous levels.

Mr. Cottarelli took over the helm of the fiscal affairs department on November 1, 2008, just weeks after the U.S. stock market crash wiped out $1.2 trillion in market value and augured a world-wide recession. It was his task to monitor rising debt levels threatening to drown economies across the globe and devise escape policies for governments.

“Under his guidance, the department has also played a central role in the Fund’s very important technical assistance to member countries, currently providing approximately half of the Fund’s technical assistance worldwide,” IMF Managing Director Christine Lagarde said.

It was a daunting job. The IMF had decades of experience advising and bailout out emerging and developing countries. But both the scale of the global crisis and the fact that some of the biggest and most advanced economies in the world were simultaneously being battered by financial and sovereign debt problems meant fund economists were treading new advice-giving ground.

It was only after euro zone governments slammed on the budget brakes that the IMF began to realize that the impact of belt-tightening on growth is far larger in crises than they previously thought. That epiphany translated into a major policy shift for the fund: it now advises credible back-loaded budget cuts that won’t starve growth.

Ms. Lagarde said Mr. Cottarelli will be sorely missed by friends and colleagues at the fund, “but his nomination to a senior government post in Italy is testimony to the superb qualities that have distinguished his tenure.”

Fiscal Affairs Division deputy Sanjeev Gupta has been named acting director interim period while the fund searches for a successor to Mr. Cottarelli.