Italian bond yields continue to climb to new euro-era records, with bonds sold within the past two days going at 7.89 per cent – a level at which Greece, Ireland and Portugal were all forced to seek bailouts. Italy has a stronger financial position and more domestic capital than the eurozone’s three bailout states, but there is still an upper limit to what Rome can afford and the markets are pushing Italy ever closer to breaking point.
In this environment the Europeans are searching for a means of containing Italy’s troubles. The threat is clear: An Italian default would rip apart the eurozone even if it did not trigger a financial cascade – though a financial cascade would pretty much be a given. One of the solutions that is supposedly being crafted involves bringing in the IMF to bail out Italy.
On the surface this does make some sense. The IMF was created to assist struggling economies with bridge funding, but while there may be a part for the IMF to play, it simply cannot take the lead role on an Italian rescue.
The IMF normally operates by a tranche-and-reform model. The bailout money is provided in chunks, and each chunk is given only after specific defined and monitored reforms are implemented. This grants the IMF leverage over the state in question to ensure that the agreed-upon reforms are not only crafted, but implemented and stuck with for the duration. Otherwise the ward is cut off, as Belarus has recently been.
Italy’s problem is more than just simply needing cash. Italy isn’t just facing an immediate funding crunch like most IMF wards. It has a pre-existing debt stock that’s about 120 per cent of GDP – it’s unserviceable, and Italy faces billions in maturing debt that must be refinanced on a monthly, and sometimes even weekly, basis – €300 billion in refinancing needs in the first half of 2012 alone.
Were the Fund to become involved, it would have to intervene regularly in the bond markets to keep Italian yields down. Such proactive activity is not only outside the existing skill sets of IMF staff, it would deny the Fund the leverage over Rome that it needs to make the reforms stick.
But most importantly, the IMF simply does not have the resources to bail out Italy, much less the eurozone as a whole. The IMF’s entire financial reserves are slightly under $US400 billion (about €300 billion). Any credible remediation program for Italy would need to be in the range of €800 billion, and that’s before taking into account the costs of recapitalising Italy’s banks.
Expanding the IMF’s reserves is possible, but it first requires buy-in of every major country (and several not so major countries) in the world. To this point that’s always required multiple years of ratification processes. Europe doesn’t have that kind of time. So while the IMF certainly has a role to play, just as it does with the Greek, Irish and Portuguese bailouts, it probably cannot shoulder more than a few dozen billion euros. Europe is simply going to have to find another source of money.
Stratfor.com Reprinted with permission of STRATFOR.