Italy, Spain may be best off with fast trip to IMF

By Hugo Dixon
November 28, 2011
ECB | IMF | Italy | Spain

By Hugo Dixon and Fiona Maharg-Bravo
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Italy’s and Spain’s new prime ministers may be best off with early trips to the International Monetary Fund. If markets do not calm down very soon, Mario Monti and Mariano Rajoy should consider asking for help with debt funding. If they move soon, they can blame the politically embarrassing move on their predecessors.

The case for early action is strongest in Italy. Monti is an unelected technocrat who has to rely on the support of Silvio Berlusconi, whom he replaced. Although the new PM’s popularity is currently high, it could melt as quickly as ice in the desert as his government implements harsh reforms. He could also lose Berlusconi support. The former prime minister’s media outlets are already sniping at the prime minister, who has been in office less than two weeks.

Monti is expected to present his plans next week. Pension reforms and measures to bring down Italy’s massive debts are likely. The euro zone summit comes on Dec. 9. If markets react favourably, Monti won’t need to call in the IMF. But if not, he’d better move fast. Funding should be in place well before Italy’s big bond redemptions start at the end of January.

Rajoy may feel less pressure to go the IMF right away as he doesn’t officially become PM until late December and has an absolute parliamentary majority. Still, tough policies that were not discussed during the election campaign could make him unpopular fast. What’s more, if Italy does call in the IMF, the market will expect Spain (and probably Belgium too) to follow suit – making such bailouts virtually inevitable. Rajoy should watch Monti’s moves carefully and be prepared to jump.

The snag is that the IMF doesn’t have enough cash to bail out both Italy and Spain simultaneously. The gross funding needs of Rome and Madrid over the next three years are 963 billion euros, according to Barclays Capital – about three times the IMF’s easily available resources. So the IMF would need a cash infusion, probably from the European Central Bank. That would not be a trivial exercise.

Comments

The US should NOT NOT NOT participate in a trillion dollar Euro Bailout. This is a Euro problem. 17.09% support of a trillion dollars of bond funding is a total loss in cases of sovereign default.

Greece defrauded the fund, and will now default, the US will lose most or all of the 39 Billion applied to the first Greek “bailout”.

Imagine Tea Partiers, OWS, and everybody in between in the streets of the US at even the notion of buring up taxpayer money in a VAIN (in all senses of the term) attempt to prop up the falling EU.

Never Never Never, not even if it would work, and it will not! Take your medicine Germany, you enjoyed a devalued currency, here is your bill.

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