Europe Update: IMF To Boost Lending By $500B, Greece Negotiates, Fitch Talks Downgrades
January 18, 2012
The big story Wednesday is the report that the IMF is looking to increase its lending firepower by $500 billion before the upcoming G-20 finance ministers meeting in Mexico City, which is scheduled for February 25-26.
According to Bloomberg, the IMF currently has approximately $385 billion available to lend out to European countries in order to fight against credit contagion in Europe. The addition of $500 billion would bring the lending capacity to $885 billion, which would go a long way toward filling the funding gap the IMF sees over the next two years.
Citing comments from an unnamed official, Bloomberg says that the IMF is proposing the expansion of its lending resources to protect the global economy against further contagion from the Eurozone sovereign debt crisis.
Managing Director Christine Lagarde said Tuesday that the IMF is looking to respond to the crisis in a meaningful way. In a statement Tuesday, Lagarde said, “The biggest challenge is to respond to the crisis in an adequate manner and many executive directors stressed the necessity and urgency of collective efforts to contain the debt crisis in the euro area and protect economies around the world.”
Bloomberg notes that the IMF is pushing China, Brazil, Russia, India, Japan and oil-exporting nations to be the big contributors. It reportedly wants an agreement to be reached at the G20 finance ministers and central bankers.
Elsewhere in Europe, Fitch may be eyeing a two-notch rating downgrade for Italy. According to Reuters, Fitch will assess Italy's ratings on the basis of refinancing levels and the outlook for future growth. Citing a senior director at Fitch, Reuters noted that an agreement on the fiscal compact will be considered in any decision on an Italy downgrade. Recall that last week Fitch said that there was a significant chance that Italy would be downgraded when the ratings firm finishes its review of the six Eurozone countries it has put under credit watch negative.
In Greece, negotiations continue today with private investors on the issue of the degree to which bondholders will accept additional writedowns. Currently, the private sector (meaning banks and hedge funds) has agreed to accept a 50% reduction in the value of their bonds. However, PM Lucas Papademos is pushing for haircuts as high as 70% in order to help Greece achieve an acceptable debt-to-GDP ratio needed for additional funding from the EU/ECB/IMF.
The issue at hand is whether or not Greece will be able to complete the debt swap deal or be forced into a “hard default” on the € 14.5 billion in bonds maturing on March 20th.
The latest reports out of the talks indicate that private investors may receive cash and securities equal to approximately 30-35 cents on the euro in the bond swap proposal with Greece.
Reuters is reporting that some hedge funds in London and New York that have recently bought blocks of Greek bonds maturing on March 20th, for around 40 cents on the euro. Obviously, these funds are balking at the latest debt swap deal. However, it is not clear how big a force the funds actually represent.
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