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Portfolio: IMF Unable to Save Italy
December 1, 2011 | 1342 GMT
Click on image below to watch video:
Vice President of Analysis Peter Zeihan examines the possibility
of the International Monetary
Fund bailing out Italy.
Editors Note:Transcripts are generated using
speech-recognition
technology. Therefore, STRATFOR cannot guarantee their
complete
accuracy.Related Links
Fed Action in Europe Underscores Dollar PrimacyItalian bond
yields continue to climb to new euro-era records, with bonds sold
within the past
two days going at 7.89 percent 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 eurozones three bailout states, but there is still an upper
limit to what Rome can afford
and the markets are pushing Italy ever closer to a break
point.
In this environment the Europeans are searching for a means of
containing Italys troubles.
The threat is clear. An Italian default would rip apart the
eurozone even if it did not trigger a
financial cascade and 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
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8/3/2019 Stratfor IMF Unable to Save Italy
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economies with bridge funding, but while there may be a role for
the IMF to play, it simply
cannot take point on the Italian question.
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 areimplemented. 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.
Italys problem is more than just simply needing cash. Italy isnt
just facing an immediate
funding crunch like most IMF wards. It has a preexisting debt
stock thats about 120 percent of
GDP its unserviceable, and Italy faces billions in maturing debt
that must be refinanced on
a monthly, and sometimes even a 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
not within 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 IMFs entire financial reserves are
slightly under $400 billion
(about 300 billion euro). Any credible remediation program for
Italy would need to be in the
range of 800 billion euro, and thats before taking into account
the costs of recapitalizing Italys
banks.
Expanding the IMFs 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
thats always required multiple
years of ratification processes. Europe doesnt 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 euro.
Europe is simply going to have
to find another source of money.
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