Sunday, November 27, 2011

Yet Another Debt Solution Floating Around Europe

Guess its good news that the European Union members continue to reach for solutions to the debt crisis. The bad news is that none of these grand ideas ever get implemented. Its only been a month since the last solution was announced but never implemented.

Now it appears the solution is for the ECB to lend the International Monetary Fund money to lend to Italy. The amount being floated amounts to roughly $800M. Presumably this would be enough to stave off the markets for 12-18 months in order to give the new Mario Monti government time to implement reforms.

Reducing the interest rates back down to 4-5% is crucial for a huge debt load. Imagine if Japan or the US had to start paying considerably high interest rates. Both countries would be sunk as only the absurdly low interest rates is holding us above water. 

Whether this new idea works is debatable, but it is a solution of significant size to give Rome time for reform. The IMF has been successful in Iceland and Ireland already. Portugal is still under a working plan, but Greece has been the great failure. Mainly due to the inability of the government to implement any meaningful reforms.

So if Italy is serious about finding a solution to reducing the debt load, than working with the IMF will solve the problem. 

Regardless, it all comes down to the EU moving forward with a a plan and almost any plan of significance would work. Italy reportedly has a fiscal surplus when eliminating financing charges. Meaning that Italy needs limited reforms to remain on course. Some initiatives to grow the economy would have huge implications on the ability to pay down debt in the future. 

Details via La Stampa:

  • If inspections in Italy IMF agreed G20 summit in Cannes have not started yet is because the director Christine Lagarde wants to give enough time to Mario Monti to launch reforms, reserving the right to help with a financial assistance program that could get to be worth up to 600 billion euros. 
  • From here the possibility of launching a "program Italy," which, according to IMF estimates circulating in the environment in Washington, could have a value between 400 and 600 billion euros in order to give the government Mountains 12-18 months to launch the necessary reforms, alleviating the need of refinancing debt. Ensuring rates between 4 and 5 percent, the IMF would offer much better conditions compared to Italy to markets where we are already more than 7-8 per cent, which would shelter from Rome to the growing pressures on government bonds.
  • The magnitude of this figure is, however, it becomes difficult for the IMF to operate only on the basis of currently available resources. Should be increased and there are several ways to do it: the issuance of new Special Drawing Rights in coordinated efforts with the European Central Bank, headed by Mario Draghi. (soon to be called Super Mario? if such a plan works)
  • This last scenario comes from the fact that the resistances in Berlin to a greater commitment by the ECB in support of states in difficulty - starting with Italy - would be less if it were money to be dished out under strict supervision of the IMF. (very key if Germany is on board with IMF solution)

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