IMF $797 Billion Italy Loan Report ‘Wide of the Mark,’ BBH’s Chandler Says
The International Monetary Fund said it isn’t discussing a rescue package with Italy and Japan said no such talks have occurred within the Group of Seven, amid concern that Italy will struggle to bring down borrowing costs.
The Washington-based lender isn’t in discussions with Italian authorities on a program for IMF financing, a spokesperson for the fund said today in an e-mailed statement. Italy’s La Stampa newspaper reported that the IMF may be preparing a loan of as much as 600 billion euros ($798 billion) to support Italian efforts to restore investor confidence.
“The IMF simply does not have the resources” on its own for such aid, Marc Chandler at Brown Brothers Harriman & Co., chief currency strategist at the bank in New York, wrote in a note to clients. It’s also unclear whether the fund would be able to get agreement on leveraging its lending capacity to such a degree, he wrote.
Italy has seen yields on its benchmark 10-year government bonds soar above 7 percent this month as investor skepticism about the nation being able to sustain its debt load deepened. Aid of about 600 billion euros would “essentially” allow Prime Minister Mario Monti’s administration to stay out of the capital markets for 12 to 18 months as it implemented fiscal tightening and sought to win back bondholders’ confidence, Chandler said.
Japan’s government isn’t sure whether Italy wants a 600 billion-euro IMF rescue, a Japanese government official said on condition of anonymity because of his ministry’s policy. The G-7 hasn’t discussed the issue, the official said.
The IMF, which extended one-third of the rescue packages for Greece, Ireland and Portugal, had about $390 billion available for lending as of Nov. 17, according to data posted on its website. The Italian daily reported that the IMF had several options to increase its firepower, including coordination with the European Central Bank.
Italy would pay an interest rate of 4 percent to 5 percent on the loan, La Stampa reported, without saying where it got the information.
“Schemes to leverage the IMF, which the proposal seems to assume, quickly run into political and technical difficulties,” Chandler said. “It is not clear who bears the cost of the risk. It is not clear that leveraging the IMF would be acceptable to a sufficient number of members.”
Bank of France Governor Christian Noyer said today that markets have forgotten Italy’s strengths, including a strong industrial base. Euro-area bond markets “are not functioning normally,” he said at a forum in Tokyo.
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