21st Mar 2018

Italy proposes 'semi-automatic' funding to avert bail-out

  • Italy's 10-year bond has climbed to 6.06 percent (Photo: Giampaolo Macorig)

Debt-stricken Italy is pushing for a "semi-automatic mechanism" to lower eurozone countries' borrowing costs compared to Germany in a veiled admission that it is also heading for a bail-out.

"The idea is to possibly discuss at the Eurogroup/Ecofin this week mechanisms which would be triggered semi-automatically when spreads widen too much, with the aim to reduce them," Italy's EU affairs minister Enzo Moavero told reporters in Brussels on Monday (18 June).

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He said the idea was on the table for talks among eurozone finance ministers (the Eurogroup) on Thursday in Luxembourg.

Amid continued uncertainty about Greece and bleeding banks in Spain, Italy has also seen its borrowing costs soar. Its 10-year bond has climbed to 6.06 percent on Monday, while Germany's bunds are trading at record low rates.

Meanwhile, Spanish 10-year bonds are being sold at even higher interest rates - almost 7.3 percent - above the seven-percent threshold that pushed Ireland, Portugal and Greece to ask for state bail-outs.

The European Central Bank (ECB) last year helped out Spain and Italy by buying their bonds and later by injecting €1 trillion in cheap loans to banks, which to a large extent used the money to also buy government bonds.

Both actions were reluctantly agreed by Germany's central bank, which fears an inflation boom and is sceptical that the "quick fixes" will work in the long term.

Having a "semi-automatic" ECB mechanism would most likely be against the no direct bail-out clause for governments enshrined in the ECB mandate.

The other option - having the yet-to-be-set-up European Stability Mechanism (ESM) intervene automatically to help out governments under market pressure is also tricky, since any disbursements have to be approved by the German parliament.

But at the same time concerns are growing that if the crisis spreads to Italy and Spain - two core EU economies - neither the eurozone's ESM "firewall" nor the recently augmented International Monetary Fund will be big enough to bail them out.

According to Bank of America, Spain may need a second, full-blown bail-out on top of the €100 billion recently earmarked for its banks. This would push the total loan to €450 billion. Italy would need even more, as it has €1.2 trillion in outstanding debt.

Emerging economies such as China, Brazil and Russia have agreed to boost their contributions to the IMF warchest, although with more modest sums than initially envisaged.

A total of €340 billion in fresh money has been committed, almost half of which comes from the eurozone countries themselves. The US, the main IMF contributor, has refused to pay any extra money.

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Italy's Mario Monti has said his country does not need a bail-out, even though its borrowing costs have soared amid contagion from Spain.

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The cost of insurance against a Spanish default reached another record on Monday, with Italy's borrowing costs also rising sharply amid market fears about the eurozone.

Merkel under pressure to move on Spain and Italy

With borrowing costs in Spain and Italy at unprecedented highs, Germany's Angela Merkel came under pressure at the G20 summit to let eurozone bail-out funds help them out.

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