Will Italy Turn to the IMF?

Rumors suggest that Italy may turn to the International Monetary Fund to cover its deficits. The costs for the nation to borrow money in the capital markets has become too high. These same rumors say that some of Europe’s largest banks will participate in the deal. That would make sense because a default would cause them to take such huge write-downs that they would become essentially insolvent. It appears that the IMF may take the role that Germany and the European Central Bank have refused to. If that is so, the eurozone sovereign debt problem may be at the start of a solution.

The IMF has only about $380 billion at its disposal. It could ask member nations for more. And the IMF probably can act more quickly than the European nations, which are hampered by political gridlock, should if they decide to use their 440 billion euro rescue fund. There has been talk of expanding that euro rescue facility through leverage or more contributions. Those plans appear to have stalled.

The IMF cannot solve the eurozone’s debt crisis, but if it were to take the first step, others might follow. An IMF action would be a sign that its members see the disaster is important enough to address, even with the attendant risk of capital. The markets could then decide that, with an anchor lender, the solution only involves a follow-on commitment from IMF member nations to replenish the fund and the actions of eurozone nations, which continue to bicker.

One school of thought is that a solution to the sovereign debt crisis has not begun because no institution or nation wants to be so foolish as to go into a high-risk situation first. Once the first fool is in, though, and that may be the IMF, others may feel a concrete solution is far from foolish.

Douglas A. McIntyre