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Italy's Prime Minister Silvio Berlusconi walks past Germany's Chancellor Angela Merkel before a working session at the G20 Summit of major world economies in Cannes November 3, 2011. (TOBY MELVILLE/REUTERS)
Italy's Prime Minister Silvio Berlusconi walks past Germany's Chancellor Angela Merkel before a working session at the G20 Summit of major world economies in Cannes November 3, 2011. (TOBY MELVILLE/REUTERS)

IMF puts Italy under 'surveillance' Add to ...

The International Monetary Fund is stepping into Italy’s escalating financial crisis, pushing the embattled nation to take swift action on its crushing debt load before it swamps Europe’s financial system.

In an unusual move that highlights the urgency to fix Italy’s deteriorating finances, the IMF announced it will send a delegation to Rome on a “verification and surveillance” mission to ensure the country doesn’t stray from broad promises made at the European Union summit last week to reform its perennially underachieving economy and bring its soaring debts under control.

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With €1.8-trillion ($2.5-trillion) of public debt and a debt-to-GDP ratio of nearly 120 per cent, Italy is increasingly becoming the focal point of Europe’s financial crisis, even as political battles rage over the bailout of Greece. While European leaders have set a rough plan for the continent’s financial system to absorb Greece’s effective bankruptcy, Italy’s obligations are seen as too big for Europe to backstop.

The IMF, along with European Commission President Jose Manuel Barroso, insisted that Italy invited the international lender to monitor the country’s progress on economic reforms and austerity measures aimed at cutting government spending sharply.

But delegates and observers at the G20 summit this week said it’s more likely that global leaders, eager for Italy to move faster and stick to its commitments, ordered Italian Prime Minister Silvio Berlusconi to open the door to IMF leader Christine Lagarde. Mr. Berlusconi, fighting for his political life at home, said Italy refused an offer of financial support from the IMF, according to some reports.

But Ms. Lagarde denied that she had offered to write a cheque, insisting that the IMF’s mission is to oversee Italy’s progress quarterly.

Mr. Berlusconi is facing growing political pressure to step down as Italy’s leader, but shows no signs of giving in. As the country’s economic crisis intensifies, he is losing support among parliamentarians and his coalition government is at risk of falling.

The IMF’s imminent arrival in Rome failed to soothe investors’ nerves. Yields on 10-year Italian bonds on Friday climbed to a new high of 6.4 per cent – essentially a crisis level – before retreating modestly, and shares of Italy’s biggest banks fell by about 5 per cent. Italy’s bond yields have surged in recent weeks, reflecting the greater perceived risk that the country will be able to manage its finances, and pushing up its borrowing costs.

The IMF’s supervision of Italy marks a rare step by the international lender to oversee the government of an advanced economy. Normally, the IMF, which often acts as a lender of last resort in times of crisis, only holds sway over a country that has already accepted an emergency loan. The IMF bailed out Britain in 1976, the only contemporary example of the fund taking a substantial role in the affairs of one of its major stakeholders.

The G20 summit, meanwhile, failed to produce specific new measures to stop Europe’s crisis, a sentiment that was reflected in the slumping markets Friday afternoon after the release of the final communiqué. One of the biggest disappointments was the lack of specific measures to boost the firepower of the IMF, which remains the prime crisis-fighting weapon as long as Europe’s enhanced bailout fund, the European Financial Stability Facility (EFSF), remains a work in progress.

Ms. Lagarde, however, insisted that the IMF had the full backing of the G20 countries. “I go away from Cannes with an unlimited, no cap, no floor plan on resources ... so that the IMF is fully equipped in cases of crisis,” she said.

Several reports said German Chancellor Angela Merkel had confirmed that few countries had offered to inject more funds into the IMF. Several heavyweight countries, among them the United States and Canada, were reluctant to write big cheques, partly out of fear that a vastly expanded IMF could do as much damage as good by taking the pressure off highly indebted countries to rein in their debts.

The G20 statement said the group reaffirmed its commitment to “reinvigorate economic growth, create jobs [and]ensure financial stability.”

The chief accomplishment of the meeting was to convince Greece’s Prime Minister, George Papandreou, to scrap next month’s referendum on the country’s ongoing membership in the euro zone by threatening to withhold bailout funds, a move that would have triggered imminent sovereign insolvency. Without fresh loans, Greece is expected to run out of cash in a matter of weeks.

While many economists and observers were largely dismissive of the summit’s accomplishments, some said its value was thrusting the euro zone crisis back onto the world stage. “We should not underestimate the sense of panic that has ruled here over the last couple of days,” said Dries Lesage, a G20 analyst with Belgium’s Ghent University. “That sense of panic has forced leaders into a quite informal way of deliberating and convening here, and that was not at all true in the past.”

Prime Minister Stephen Harper was more optimistic that the G20 summit had paved over the worst of Europe’s crisis and set the path for growth, as long as Europe’s leaders follow through on the bailout plan they unveiled at last week’s EU summit in Brussels.

“I still believe that this plan can be implemented, I still believe we can move forward and I still believe we can avoid a recession,” Mr. Harper said on Friday. “There’s a lot of money sitting in the stock markets waiting for opportunities. And I see every indication that markets are constantly searching for good news and opportunities. So I think the sooner European leaders and markers can simply confirm that they’re moving forward, that would be the quickest way to get us out of this crisis.”

With files from reporter Doug Saunders in Cannes

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