Preparing for default : Quick! More sandbags (filled with cash) [07/11/2011]
The Economist | Cannes
THE BEACHFRONT of Cannes is deserted. The streets are still. The city is quiet, apart from the rumbling of journalists pulling their rolling bags and motorcades whisking G20 leaders to and from their hotels.
One can almost hear the scraping of shovels as European leaders rushed to fill the sandbags in the hope of surviving the impending explosion in Greece, perhaps followed by Italy.
What they need is bags and bags of money to strengthen the existing rescue fund, the European Financial Stability Facility (EFSF). But there is no more cash to be had, so it must be conjured up through financial engineering.
European leaders claimed at their last summit that the EFSF would be expanded to €1 trillion, but this never seemed adequate, while legal and political problems are hampering progress. “There are some creative solutions,” is all one person close to the discussions would say, expressing doubt that it could be concluded by the end of November. This is uncomfortably close to the mid-December moment when Greece runs out of money and, unless it receives more money, must default.
One source of extra money might be the IMF, which helps to explain why Barack Obama joined European leaders for crisis talks last night. The fund can only lend to states, rather than buy bonds on the markets, as the revamped EFSF is intended to do.
But perhaps, say European leaders, richer emerging economies could contribute more money to the IMF. Another option, likely to be approved, is for the IMF to make available new lines of credit for well-managed countries suffering from “exogenous shocks”, though it is unclear whether this would apply to Italy. More esoterically, the IMF could, through its ability to produce liquidity known as Special Drawing Rights, make more resources indirectly available for European states to pump into the EFSF.
One thing the IMF can certainly do is to monitoring countries’ finances. It already works with the European Commission and the European Central Bank (ECB) in bailing out Greece, Ireland and Portugal, and in assessing their reforms. The last troika report on Greece, much gloomier than previous ones, seems to be partly the result of IMF demands for a more “realistic” appraisal of Greece’s prospects.
Even though Italy is not being formally bailed out, senior sources say it is likely that the IMF will be brought in to help monitor its implementation of a raft of promises to promote growth and bring down its vast debt.
But without the firepower of the ECB, nobody really believes any of these measures can really withstand the blast if Italy blows up after Greece. The one bit of good news was the first move by Mario Draghi, the newly-installed ECB president to cut interest rates. Even amid the gloom over Greece, markets rallied. But nobody should stop digging for cash.
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