London: The Franco-German plan to save the single currency was big on what the Eurozone will look like in a year's time. But its immediate aim was to arrest the spiral towards default that seemed to have taken Spain and Italy into its grip.
The agreement may buy political cover if the European Central Bank needs to step up its intervention to support Italian and Spanish bond prices. But the institution whose role is left unclear is the International Monetary Fund. The IMF has been wheeled into the Eurozone bailouts over the past 18 months to provide a minority of the money, but a majority of the policy credibility.
Repeated rallies
In theory, if the Franco-German plan works and the EU is going to set the rules as well as provide the money, there may be little future role for the IMF. Yet given the long string of failed Eurozone crisis summits and masterplans so far, that is one of the "ifs" of the century.
IMF officials, tired of being regarded with suspicion, especially in Asian countries bruised by the fund's role in the regional crisis of 1997-98, must be cheered by the talismanic properties that the organisation has more recently acquired in Europe. Rumours that the IMF is about to get involved in an Italy or Spain bailout, however thinly sourced, have caused repeated rallies in European equity markets in recent weeks.
It is sometimes hard to remember that the IMF had to struggle mightily last year to overcome ECB resistance and insert itself in the Eurozone bailout process in the first place. Its admission into the "troika" of lenders along with the ECB and the European Commission for the Greece, Ireland and Portugal bailouts reflected an acceptance that its staff had unequalled technical expertise in setting and monitoring lending conditions.
Gatekeeper role
In the short to medium term, the IMF might well be called upon to play a similar gatekeeper role. If the ECB does start to intervene on a much bigger scale to buy up Italian and Spanish debt, it will find itself faced with an uncomfortable trade-off — the bank needs to create enough of an impact on bond yields to arrest a destabilising debt spiral, while not creating what it regards as a moral hazard by encouraging those governments to go slow on fiscal consolidation.
At the moment, the fund is conducting "enhanced monitoring" of Italy's policies, which some officials regard as in effect leading to an IMF shadow-lending programme. And as every financial market trader must surely know by now, given the string of rumours that a gigantic bailout is imminent, the ECB can use the IMF as a conduit if it wants to turn that shadow into substance and lend large amounts direct to Eurozone governments to prevent default.
Some involved in the discussions doubt the wisdom of what has been rumoured — a giant bailout of around ¤600 billion (Dh2.95 trillion) to remove Italy's need to borrow from the private markets for the next year at least. Italy is the world's third-biggest sovereign borrower and its officials are extremely skilled at debt management. If it leaves the market, it might find it hard to get back in.
More constructive might be the kind of lending programme that the IMF successfully conducted with Turkey in the early 2000s, which helped Ankara roll over its giant financing needs while still borrowing in private markets.
Yet perhaps an even bigger threat to the IMF is not whether it is involved, but whether the lending conditions are right.
— Financial Times
