Latin dance

Italy’s and Spain’s new prime ministers may be best off with early trips to the International Monetary Fund. If markets do not calm down very soon, Mario Monti and Mariano Rajoy should consider asking for help with debt funding. If they move soon, they can blame the politically embarrassing move on their predecessors.

The case for early action is the strongest in Italy. Monti is an unelected technocrat who has to rely on the support of Silvio Berlusconi, whom he replaced. Although the new PM’s popularity is currently high, it could melt as quickly as ice in the desert as his government implements harsh reforms. He could also lose Berlusconi support. The former PM’s media outlets are already sniping at the prime minister, who has been in office less than two weeks. Monti is expected to present his plans next week. Pension reforms and measures to bring down Italy’s massive debts are likely. The euro zone summit comes on December 9. If markets react favourably, Monti won’t need to call in the IMF. If not, he’d better move fast. Funding should be in place well before Italy’s big bond redemptions start at the end of January. Rajoy may feel less pressure to go the IMF right away, as he doesn’t officially become PM until late December and has an absolute parliamentary majority. Still, tough policies that were not discussed during the election campaign could make him soon unpopular.

What’s more, if Italy does call in the IMF, the market will expect Spain (and probably Belgium, too) to follow, making such bailouts virtually inevitable. Rajoy should watch Monti’s moves carefully and be prepared to jump.

The snag is that the IMF doesn’t have enough cash to bail out both Italy and Spain simultaneously. The gross funding needs of Rome and Madrid over the next three years are euro 963 billion , according to Barclays Capital – about three times the IMF’s easily available resources. So, the IMF would need a cash infusion, probably from the European Central Bank. That would not be a trivial exercise.