The IMF is reported to be putting together a loan package of from €400-600 billion, according to La Stampa via Bloomberg. Apparently IMF director Christine Lagarde wants to give the Mario Monti government enough time to launch reforms and then back them up with this huge loan. Loan interest rates mentioned were from 3% to 5%. Right now, Italy is now paying between 7% – 8%.
There are two big stumbling blocks to this bailout:
- Will Monti be able to keep the wolves at bay with meaningful fiscal reforms?
- Where will the IMF get the money?
No. 1 is questionable. Like Greece, they have strong unions and an active and popular Leftist movement, and they don’t like to pay taxes. Pensioners and government employees like it the way things are. But, Italy has a much more dynamic economy than Greece.
No. 2 is an even bigger “if.” It is pretty obvious funds will come from the ECB, perhaps through special drawing rights, a kind of reserve of euros they could pledge to the ECB against fiat euros. Germany doesn’t like involving the ECB.
I think the chances of this getting off the ground are close to nil.
But it is important to note the huge size of this fund. Remember that our TARP pledged $700 billion, spent $356 billion, and got back $118 billion.