This is huge—if it holds up.
Italy’s “La Stampa,” one of Italy’s most influential newspapers (and one owned by the Fiat Group rather than the Berlusconi media empire), has reported that the International Monetary Fund is preparing a 600 billion euro ($794 billon) credit line that Italy can use if its current liquidity squeeze becomes a deeper crisis.
A story that says that Italy is talking to the IMF isn’t surprising. Spain is talking to the fund too. Last week the International Monetary Fund moved to establish potential credit lines for financially responsible countries that were experiencing a liquidity crisis.
But the size of the package is stunning. It’s the kind of bazooka that has been missing in this crisis so far. It’s enough to buy new Prime Minister Mario Monti 12 to 18 months to put economic reforms into place without having to go to the financial markets to refinance Italy’s debt at interest rates well over 7%. (The story says the IMF interest rate would be 4% to 5%.)
What’s intriguing to me is that International Monetary Fund doesn’t have this kind of money. A credit line of this size would require some kind of agreement with the European Central Bank where the bank would provide the cash and the IMF would provide the conduit and a program of strict economic reforms that would give the central bank and the German government of Angela Merkel political cover. IMF auditors are already at work going over Italy’s books as part of an earlier agreement with the then-Berlusconi government.
An arrangement of this kind has been one of the most talked about potential “solutions” to the current crunch. (Of course, by itself as German Chancellor Merkel has pointed out over and over again recently, this kind of credit line wouldn’t solve the problems of the EuroZone But kicking the crisis 12 to 18 months done the road would sure by welcomed by EuroZone leaders right now.) We’re not looking at anything like a done deal here—getting the European Central Bank and the German government to agree to “rescue” Italy and Spain in this fashion won’t be easy.
But after last week when every story was about what would not be done and about rising interest rates from Italy to Germany, this report starts the week on a positive note.
In fact it’s just one of a number of ideas floated over the weekend for addressing the crisis. As I’ve noted recently, this is exactly what we can expect as the December 9 summit of European leaders approaches. Look for more potential “solutions” to hit the press as EuroZone leaders try to come up with a credible mix of programs for their summit.
Initial financial market reaction to this story has been positive. In early morning trading the Shanghai Composite was up 0.5%, Hong Kong’s Hang Seng was up 1.7%, and Japan’s Nikkei 225 was up 1.9%. Futures on the U.S. Standard & Poor’s 500 were up 1.8% indicating that U.S. markets could open on an up note Monday after being pummeled last week.
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