Sunday, November 27, 2011

$800 billion IMF bailout for Italy?

The financial media are moving a story out of Italy (La Stampa) that the IMF will launch an $800 billion rescue of Italy and Spain:

The International Monetary Fund is being lined up potentially to help Italy and Spain amid growing fears that a European rescue scheme will not be able to prop up the countries, it emerged last night. Reports in Italy suggested that the IMF is drawing up plans for a €600 billion (£517 billion) assistance package for the country. Spain may be offered access to IMF credit, rather than a rescue package, to avoid it being “picked off” by the markets in the coming weeks. (Telegraph)

What is even more incredible is that Bloomberg reports that this story is moving markets.

Now for a dose of reality. The IMF has never and will never engage in a major operation without the active consent of the US for obvious reasons. Therefore, a rescue of the eurozone on any scale (let alone $800 billion!) requires US consent which, in practice, includes the House of Representatives, which holds the purse-strings. This would require Treasury (Geithner) to consult with the House (Boehner). Boehner would have to consult with his caucus, who would be outraged at being even asked. (Some perspective: Two presidential candidates are members of the IMF subcommittee: Ron Paul and Michelle Bachmann.)

Secondly, the IMF’s balance sheet is currently around $360 billion. It would be a bit of a stretch for a $360 billion institution to launch an $800 billion rescue of a single member, even if the US was on board.

So this market-moving story is untrue. Once the market figures that out, it will begin to sink in that there is no deus ex machina in the wings for the Italians and the Spanish. And once the market has finished grasping at straws, it will have to begin to process what is really going to happen: the unthinkable.

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