The International Monetary Fund could pour more than $100 billion in short-term loans into Italy under a program recently expanded as part of an effort to ramp up the fund’s crisis fighting.
But a broader bailout of the country remains problematic as European, IMF and other international officials debate how extensively the burden of Europe’s rescue should be spread around the globe.
For example, it remains unclear how the IMF can use $270 billion in pending loans from European central banks. The money can’t simply be recycled back through a special fund to aid Italy or other indebted European countries. European officials worry that would violate euro-region treaties. But funneling it into the IMF’s general account poses problems — including restrictions on its use, and a growing sense that a more expansive IMF involvement in Europe exposes the fund to risks the region can and should bear on its own.
“They are effectively translating the risk from Europe to the international community and this is creating a lot of friction,” said Domenico Lombardi, a senior fellow at the Brookings Institution and former IMF board member from Italy.
Debate about the fund’s need for more money and its ability to respond in Europe remains underway, however, and in November it led the agency to expand a little-used emergency lending program. Although modest compared to the hundreds of billions of dollars in bonds that Spain and Italy have to sell next year, the precautionary lending could at least provide a quick response should either face trouble.
The IMF considers Europe a chief risk to the global economy — and Italy perhaps the paramount risk in Europe. The country is burdened with a massive level of debt, turgid economic growth and a political system that until recently seemed paralyzed as its borrowing costs and pressure from financial markets increased.
Despite the latest European promises of long-term changes in how the 17-nation euro zone is managed, a sale of five-year bonds by Italy on Wednesday pushed the country’s borrowing costs up yet again.
In an interview in Washington on Wednesday, the Netherlands’ minister for European affairs, Ben Knapen, said the region hopes that the IMF can deepen its role in the crisis response — and wants to make sure the agency is adequately funded for any problems that lie ahead.
“There are huge benefits from a political and financial point of view” because of the IMF’s “long history of independent discipline,” Knapen said.
Involving the IMF also avoids some of the financial constraints building in Europe: Asking France to contribute more to direct bailouts of its neighbors, for example, could wreck the country’s AAA credit rating and cause broader problems.
But a traditional IMF program for Italy would be controversial — requiring the Italian government to take the politically difficult step of admitting that it needs help, and probably exhausting the IMF’s available money in a multi-year financing effort.
Another option is using the fund’s recently expanded precautionary lending program, which allows nations that are considered reasonably well-managed to quickly tap the IMF in at least a limited way. The precautionary loans, intended to help countries through cash crunches of just a few months’ duration, would still be subject to some fund oversight and demands for reform.
The program also is meant to eliminate the “stigma” of a traditional IMF bailout, something the agency acknowledges can make political authorities wary of seeking help.
The liberalization of the precautionary loan program “would enable the Fund to proactively channel liquidity in response to sudden and possibly contagious shocks, thus enhancing the Fund’s ability to deal with a broader set of crises,” fund officials wrote in an October paper detailing new ideas for its crisis-fighting efforts.
Under the modified program, Italy could tap the IMF for about $30 billion every six months for up to two years.
Despite months of debate at the highest levels of major governments around the world, it remains unclear how a rescue of a country the size of Italy would be effected if it is ever needed.
The level of IMF’s available money, however, is creeping ever higher: Between outstanding credit lines, a possible capital call on its members and the upcoming loans from Europe, the fund’s available resources could top $1.4 trillion next year, a quadrupling of its financial firepower since the onset of the 2008 financial crisis.