Jeopardizing the Euro

[xiinfaniin]

November 4, 2011

Italy Agrees to Allow I.M.F. to Monitor Its Progress on Debt

By LIZ ALDERMAN

 

CANNES, France — Acceding to pressure from European leaders, Italy “invited” the International Monetary Fund to look over Rome’s shoulder to ensure it is carrying out reforms designed to keep the country from succumbing to Europe’s widening sovereign debt crisis, European Union officials said Friday.

 

In an extraordinary move, Italy said it had invited the fund to scrutinize its books every three months to make sure a $75 billion dollar austerity package is carried out according to plan. A team from the European Commission will also travel to Rome next week to start monitoring Rome’s efforts, the president of the group, Jose Manuel Barroso said.

 

Should Italy get swept up in the debt contagion, its $2.5 trillion debt load would threaten to overwhelm even the latest bailout vehicle being assembled, the $1.4 trillion European Financial Stability Facility, taking Europe’s debt crisis to a new level and potentially weighing on the global economy. Even that backstop seemed to be in doubt on Friday after the summit meeting of the Group of 20 nations broke up with little apparent progress on resolving Europe’s debt crisis, aside from the decision to have the I.M.F. monitor Italy’s fiscal progress. Germany’s chancellor, Angela Merkel, admitted that Europe’s leaders had so far failed to interest any of the Group of 20 nations to invest in the new facility — —a major goal of European leaders.

 

Mrs. Merkel said cash-rich countries like China and Russia wanted to see more guarantees that they would not be throwing good money after bad before making any commitments. They are particularly keen to have the I.M.F. oversee any such fund to guard against losses on their investments.

 

A separate effort to bring more I.M.F. money to the table has also failed to get off the ground, at least for now, though officials are said to be looking to raise money through a sort of trust fund. Separately, the group has discussed setting up lines of credit to help small countries hurt by the crisis.

 

Fears that European leaders still have not nailed down the details of a grand plan designed to contain the euro crisis have caused Italy’s borrowing rates to spike higher in recent days to levels approaching those that forced Greece, Portugal and Ireland to ask for bailout packages from their European partners.

 

Yet, Prime Minister Silvio Berlusconi’s shaky coalition government is having trouble implementing a number of painful austerity measures passed recently to reduce the nation’s deficit and its mountain of debt, which is the second highest in the euro zone after Greece.

 

Further complicating matters, his government is hanging by a thread, and faces challenges from his main coalition party, the Northern League, which has already said it does not agree with all the structural changes adopted by Rome to bring the nation’s finances under control.

 

President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany have been pressuring on Mr. Berlusconi to fulfill Italy’s financial commitments, but to date the Italian prime minister has been able to muster only a letter outlining his government’s intentions.

 

Publicly, European officials are presenting Italy’s decision to bring in the I.M.F. as purely voluntary. “We didn’t put Italy in a corner,” Herman van Rompuy, the European Commission president, said. “They themselves decided to invite the I.M.F..”

 

But few countries in the world are eager to surrender their sovereignty to the fund, and Italy appears to be no exception. Behind closed doors, said one European Union official, leaders encouraged Mr. Berlusconi to bring in the group’s auditors to demonstrate to world markets that Italy is making a credible effort to cut its deficits and make changes designed to restore growth, which is currently close to non-existent.

 

It is an extraordinary step for the fund, which typically only monitors countries that are recipients of bailouts. But the I.M.F. appears to be increasing its clout and presence in Europe as the crisis grows. Among other things, its managing director, Christine Lagarde, wants the group to oversee a part of the proposed European bailout fund, which is seeking to lure financial contributions from Japan, China, Russia and other cash-rich countries.

 

The I.M.F. is already overseeing the bailouts of three Western European countries, Ireland, Portugal and Greece, a scenario that would have been all but unthinkable just a few years ago.

 

The announcement of the I.M.F.’s surveillance in Italy comes just two days after the Greek prime minister, George A. Papandreou, called for a referendum on a bailout deal for Greece, throwing financial markets into a tailspin and sowing panic among leaders of the Group of 20 industrial nations who have been searching for ways to stem the contagion.