IMF Preparing $794 Billion Bailout For Italy

By: EW News Desk Team   Date: 28 November 2011

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28 November 2011

The IMF is drawing up a 600 billion euro ($794 billion) bailout plan for Italy as a safeguard for the country in the event that the its debt crisis escalates even further, reported Italian daily La Stampa as cited by AFP on Sunday.

The report quoted IMF officials in Washington, who told the Italian paper that the bailout package would consist of loans at a favourable interest rate of between 4-5 percent, compared with the 7-8 percent that the country recently paid at its last bond auctions.

The money would also give newly appointed Italian Prime Minister Mario Monti a window of 12 to 18 months to implement urgent budget cuts and growth-boosting reforms "by removing the necessity of having to refinance the debt," added the paper’s sources.

Italy's 1.9-trillion euro ($2.5 trillion) public debt and low growth rate have sparked recent market concerns that Europe’s third largest economy may have no other choice but to seek a bailout.

Related: Italy Economy

Related: Italy Economic Statistics and Indicators

Earlier this month, Monti's predecessor Silvio Berlusconi told the media at the G-20 summit in France that he had turned down an offer of financial aid in the form of a precautionary credit line from the IMF, although IMF chief Christine Lagarde later denied the claim.

Monti, a former top EU commissioner who was installed as the Italian Prime Minister on November 16 after market panic forced Berlusconi out, now appears more likely to accept a bailout plan as he face continued pressure, from both within and outside Italy, to speed up the nation’s anti-crisis measures and reforms.

According to Italian news reports, a newly formed package of budget measure is likely to be approved at a cabinet meeting on December 5 ahead of an EU summit on December 9.

"IMF intervention is inevitable but not enough," warned Paolo Guerrieri, an economist at the College of Europe in Bruges, to La Stampa.

"There is a grave risk of a liquidity crisis soon in the entire eurozone, including both sovereign states and banks," Guerrieri said.

Related: SOS – The Eurozone Can No Longer Save Themselves: Raghuram Rajan

Related: The Endgame For The Eurozone Has Begun: Nouriel Roubini

"Italy and Spain need the necessary time to carry out reforms," he added.

The IMF is likely to seek external help to fund the bailout plan, with reports suggesting that the European Central Bank (ECB) may be a co-lender to the bailout while the IMF plays the role of a guarantor.

"This scenario is because resistance from Berlin to a greater role for the ECB in helping states in difficulty – starting with Italy – could be overcome if the funds are given out under strict IMF surveillance," said La Stampa.

Earlier this month, The European Union and the ECB sent auditors to check on Italy's public accounts, with the IMF is set to send their own experts to Italy soon under a special surveillance mechanism agreed at the G20 summit.

Related: Capital Controls & Currency Wars: Will The G-20 Get It Right?

Related: The G-20 Must Get Its Act Together: Gordon Brown


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