IMF seeks role in saving euro, analysts warn about Madrid

VLADIVOSTOK/MADRID

Protesters hold a banner with a devil-like picture of Mario Draghi during a demonstration against the European Stability Mechanism (ESM) in Karlsruhe, southern Germany, reads &Don’t give ESM a chance’ The Constitutional Court in the southwestern city of Karlsruhe is currently weighing a raft of complaints against the eurozone’s permanent ESM rescue shield and the European fiscal pact for greater budgetary discipline. AFP photo

The International Monetary Fund (IMF) is interested in a role in the design and monitoring of the European Central Bank’s (ECB) plan to staunch the eurozone debt crisis with unlimited bond purchases, Managing Director Christine Lagarde said yesterday.

Under the bond-buying plan, devised by ECB chief Mario Draghi, the central bank would stand ready to buy any amounts of sovereign debt with maturities of up to three years in return for a bailout deal with tight strings attached Germany, which was openly critical about the move, chose to remain silent after the decision on Sept. 6. 

“We shall certainly be ready to help and to assist in the design and monitoring of eventual programs of all conditionalities that would be part of the solution,” Lagarde told reporters in the Russian port city of Vladivostok after an Asia-Pacific regional summit.

The exact scale and nature of the IMF’s involvement in the bond buying plan - including whether it might deploy its balance sheet - is not yet clear.
Lagarde said, according to Reuters, that she had already described the policy steps taken by Spain and Italy - the large eurozone countries facing the most acute debt challenges - as “strong.”

That comment appeared to point to IMF support for both the Draghi plan and efforts already undertaken by debt-laden eurozone states to put their finances on a sustainable long-term footing. “The ECB said itself that it welcomed highly the involvement of the IMF. We are keen to help,” Lagarde said.

 “Clearly, when we get involved, we want to be involved both in the design and the monitoring of programs. We don’t particularly like to do monitoring without having participated actively in the design.”

 In a statement issued after the annual Asia-Pacific Economic Cooperation (APEC) summit, Lagarde said that European policy steps “pave the way forward.”

Spanish bailot

However, analyst are not as optimistic as Lagarde about Spain. Willing or not, Spain is heading towards a full-blown bailout with IMF supervision, strict conditions and the threat of even more painful austerity cuts, they told Agence France-Presse.

“The sooner the request is made the better given the elevated public financing needs up to the end of the year, as much at the Treasury (83 billion euros) as the regions (33 billion euros,)” analysts at Spanish brokerage Renta 4 said in a statement.

Once the rescue is agreed, the ECB would buy Spanish bonds lasting between one and three years on the open market while the eurozone bailout fund could buy newly issued bonds.

If the market even suspects Spain is not seeking a rescue, its borrowing costs would soar and the nation would be forced into an emergency bailout, said analysts at Link Securities. “This scenario would be absurd considering the plan that has been outlined by the ECB,” it said in a report.

Barcelona-based economist Edward Hugh said Spain had yet to complete the initial steps of its banking rescue.

 For example, it has yet to oblige holders of bank preference shares to suffer losses -- a politically costly move since many of the shares were sold to bank customers who did not understand what they were buying.

 “What this says to me in big letters is ‘implementation problems,’” Hugh said.