Now we know. Finally. It is the IMF, led by Christine Lagarde, to the rescue. If this morning's report from Bloomberg -- that Italian daily La Stampa reported the IMF is about to rescue Italy -- is correct.
According to Bloomberg, the paper reports that the IMF will create a credit facility for Mario Monti and the Italian Treasury whereby Italy will not have to contend with the vagaries and harshness of the free-market for it's bonds. The IMF will lend Italy up to 600 million euros over the course of the next 18 months while promised fiscal reforms are implemented. The IMF will do so at rates of interest between 4%-5%. Problem solved. Case closed. Well, almost. There is one problem: The IMF is vehemently denying the report this morning, according to multiple sources.
Although I have been calling for a G-20/IMF/World Bank comprehensive solution to the euro mess in my articles and commentary on SA for weeks now, I take no comfort in this plan. The operative word here is "comprehensive."
When we consider this in its totality, there are many takeaways. I believe the primary ones are:
- The IMF support facility is stark confirmation of the eurozone's complete inability to handle the situation within Europe's own institutions and through existing mechanisms.
- Merkel wins the stand-off, as Germany steps out of "lender of last resort" status.
- ECB is let off the hook. No big monetary expansion now.
- Sarkozy saves his beloved banks. So does Merkel. Not to mention the Italian banks salvaged as well.
- Now the EZ can do the overall bank bailout in peace.
- It takes a technocrat. Who better than Lagarde to implement this? She is the consummate insider. Her credentials include former French Finance Minister, and former Chairperson of Baker and Mackensie, a very influential and well-connected, Chicago-based, international law firm. Direct ties to the White House abound through her history here.
This new development is anything but an accident. By definition, this plan has the tacit -- no, make that direct -- backing of the primary G-20 members. There is no way an authorization of this magnitude was not granted by the U.S., China, Japan, Great Britain, etc. The "save the world" argument carried the day.
The thinking was obviously that Italy was the primary risk in the contagion factor buzzing around all the European sovereigns. The ECB had no mandate to backstop through printing, and was not about to get one from Germany. The strictures and structures of the EU, ECB and EZ clearly made any required referendum(s) cumbersome and untimely, in any best-case scenario. This is the perfect plan?
Now for the questions:
- What about Spain, Portugal, Ireland, Belgium and France? Oh yeah, and Germany? Do the math here. You will not like the answers, despite the pop these various bonds may get on Monday.
- How does this affect Greece? Greece still cannot pay. Greece does not want to pay. And they clearly told the World this on Friday.
- Where does this leave all those pesky Credit Default Swaps (CDSs)? Greece's outright and disorderly default is imminent.
- How does this plan amend the significant imbalances inherent in the euro? Anyone thinking this ends the problem, and that Germany and France can ride off into the sunset, is dreaming.
- What about the banks? The recapitalization of the banks is still hangig in the balance. There are still so many unanswered questions about this aspect, it is painful to recall them all.
- Will the time this buys Italy allow for the implementation of reforms, and will those reforms really work to improve Italy's overall situation? Again, we are back to austerity being the cure for unsustainability. Please alert me to the situation where this has worked to restore any semblance of balance without a substantial haircut of principal. Let us see: Argentina? No. Russia? No. Ecuador? No.
There are many more questions which could be added to the list. The EFSF, ECB, new mandates, strictures and procedures for the EZ, and the roles each of these institutions play in the many detailed aspects of the crisis, chief among the queries. Suffice it to say that this is the ultimate can-kicking exercise to date. Markets should rally briskly on Monday and beyond, as the kool-aid is consumed by the bucket!
Enjoy it all. But please remember, math never lies, and will not suddenly start to!
Disclosure: I am long SPXU.