The global financial community is laughing at Europe. Financial market's reality is light years ahead of actions of politicians who struggle to jump over their own shadow to serve the greater good.
The bloodbath in European sovereign bond markets over the last week triggered the IMF to step up and provide an unprecedented loan to Italy, according to an Italian newspaper.
Last week action
Friday's announcement of another Eur 8bn planned issue in 2-year notes triggered a massive sell-off in an already extremely weak Italian debt market. Short term yields exploded, creating inverted yield curves. 2-year debt traded up 35bps to 7.7%, up some 300bps in November alone. 10-years were up as well but traded around 7.3%
The latest sell-off came as quite a surprise by many commentators as some reform measures have already been announced. More importantly, Prime Minister Berlusconi got quickly ousted and replaced by the "dream" candidate Monti.
IMF stepping in
Italian news paper "La Stampa" published a report on its website on Sunday afternoon saying that the International Monetary Fund would lend Eur 400-600bn to Italy at rates between 4 and 5%.
Strict reform measures would have to be taken in order to reduce debt and encourage economic growth according to the reading. The package would give Prime Minister Monti a window of 12 to 18 months to make the necessary reforms, supported by the IMF, without facing constant pressure from financial markets. Officials acknowledge that access to raise new capital is drying up fast, and Italy needs to refinance Eur 300bn in 2012 alone, which is impossible in today's circumstances.
Will Italy accept it?
Can Prime Minister Monti sell the package to his people? A roadmap designed by the IMF will create a harsh reality for Italy's civilians in the years to come. It is not just the people who suffer, senior bond holders will lose as well as IMF loans will automatically get seniority over current senior bond holders (most of which is held within Italy).
Monti is going to face a harsh task selling this package to Italy, expect new riots in the coming weeks.