IMF Considers Loan to Italy

A Solid Foundation of Ignorance…

Did Europe implode over the weekend? No. Not yet. And this leads us to an important point about the next few years: do not underestimate the power of the interventionists to intervene and manipulate. They still have a few tricks up their sleeve.

For instance, the story moving stock markets up this morning is that the International Monetary Fund (IMF) is in talks to make a €600 billion loan to Italy. Details were sparse. But the idea is to give EU technocrat and new Italian Prime Minister Mario Monti about a year and half to get Italy’s fiscal house in order. The IMF loan to Italy would help satisfy a large part of Italy’s government borrowing needs for the next year.

One big benefit of the loan to Italy, is if it were to actually happen, we could stop talking about Italian bond yields for awhile. (Even giving us the chance to talk about Australian government bond yields). There’s only so much you can say about them anyway, especially when they keep going up. But this relief would only be temporary.

If the IMF does find the money to loan to Italy, it will have to find money for Spain, and for Ireland, and for the Belgians (who just had their credit downgraded again over the weekend). Unless the Italian “solution” brought down government bond yields generally, the basic problem in Europe is still the same: the governments need to borrow more money than anyone actually has.

Our armchair reckoning is that the IMF loan to Italy story has been put out there to buy the Germans and the French more time to twist arms and change Europe’s treaties. We used to see this all the time as a 16-year-old page in the US House of Representatives. Votes would be “held open” for hours at a time while deals were literally done at the back of the chamber until the required number of votes was reached (the ugly sausage factory of democracy, where you see how laws are really made).

In this case, the French and the Germans are using the European crisis to try and achieve more fiscal convergence and integration in Europe. Convergence is a big French word that translates into the loss of fiscal sovereignty in Europe. Brussels, Berlin, and Paris will call the shots in Rome, Athens, and Madrid if the Franco-Teutonic alliance gets its way.

There is a whole historic and geopolitical aspect to this debate that we wrote about in Friday’s Australian Wealth Gameplan update (where such issues are discussed). Europe is having a kind of civil war without the armed conflict. Will it become a Super State or will the separate states go their own way and have their own currencies (again?)

The Eurocrats are acting as if they have time to sort this out. But this could be a mistake. Investors have already voted with their feet on the European bond market. They want out. This is the reason the IMF is involved at all. And it suggests that policy makers in Europe are still the conceited, elitist, slow-footed nincompoops they’ve been for the last 50 years.

Does anyone really believe that what Europe needs is more integration at the supra-government level? Will more centralisation over taxes and national government budgets make countries like Greece and Spain more economically competitive? Will it solve the problems created by the common currency? And will the people of Spain and Italy and Ireland allow the people of Germany and France to have a veto over their government finances?

We say “the people” but clearly they are the last people being consulted here. This whole European debt crisis has been an exercise in the elites of the European Welfare State trying to save their bankrupt system with gimmicks and tricks and by making everything bigger and more centralised. It’s what has to happen. But it’s bound to fail.

Dan Denning,
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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CJ Anderson

Hi Dan, thought you might like the following. It might be all over inside of two weeks.

The Eurozone has 10 days left before it collapses. Carl Weinberg, chief economist at High Frequency Economics, warned in a report Sunday that some European banks are nearing the breaking point as their bond holdings plunge in value, erasing capital from their balance sheets.

“We believe the endgame is now in sight, with bank failures likely at year-end, or perhaps sooner,” Weinberg said. “We worry about a credit crunch strangling the economy of the Eurozone: Banks with capital deficiencies do not write loans.”

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