The ECB-IMF-Italy roundabout switcheroo | FT Alphaville

The ECB-IMF-Italy roundabout switcheroo

The idea that the ECB could lend money to the IMF, which in turn would lend to Italy (and/or Spain), is no longer idle speculation. US markets are abuzz with the possibility, and officials at the two institutions are mulling it over, according to Reuters.

This switcharoo was doing the rounds last week among IMF-types, as the FT’s Alan Beattie noted on The World blog. We chatted about it on Markets Live, too.

Lending to the IMF would allow the ECB to overcome the legal restrictions placed on its bond buying programme — or as some would have it, the German interpretation of those restrictions. The treaty allows open market operations but not “monetary financing” through the direct purchasing of government debt.

Under section 23 of its protocol, however, the ECB can conduct the following “external operations”:

The ECB and national central banks may:

— establish relations with central banks and financial institutions in other countries and, where appropriate, with international organizations;

— acquire and sell spot and forward all types of foreign exchange assets and precious metals; the term ‘foreign exchange asset’ shall include securities and all other assets in the currency of any country or units of account and in whatever form held;

— hold and manage the assets referred to in this Article;

— conduct all types of banking transactions in relations with third countries and international organizations, including borrowing and lending operations

Business Insider reckons “the IMF would probably end up providing funding to the EFSF and that would buy up sovereign debt”. But it’s actually more a way of avoiding the flaws of the EFSF, than papering over them. (And as commenter Legal Tender point out — the EFSF is not a country, making it tricky, to say the least, to find a way for the IMF to invest.)

If the IMF acted alone (with loaned ECB money) it could probably attract more resources from China and other EMs, who have thus far been sceptical of the revamped EFSF. They’ve also expressed concern that the IMF is risking too many resources on Europe without the ECB contributing much — a criticism that would be rendered bunk by this idea.

All this begs questions around how much each would contribute and on what terms. Would the ECB money go into general revenues? If not, would their be any quasi-seniority issues?

We’re getting a little ahead of ourselves.

Although not by too much, perhaps, looking at this change of personnel at the IMF, announced Thursday:

(Reuters) – The International Monetary Fund replaced its European Director with a powerful, well-connected, insider on Wednesday in a sign the global lender is setting a more forceful course of action in dealing with the European crisis.

The global lender named Reza Moghadam, currently director of the fund’s strategy, policy and review department, as its new director for Europe, replacing Portugal’s former central bank vice-governor Antonio Borges ….

… Last month, Borges was forced to issue a hasty retraction after suggesting publicly that the global lender could buy Spanish or Italian bonds alongside the euro zone’s bailout fund. He amended his remarks to say the IMF could only lend its funds to countries and could not intervene in bond markets directly.

Moghadam has been an influential behind-the-scenes policymaker in the Washington-based IMF, playing a key role in modernizing the Fund and adapting its lending tools to make them more relevant to rising emerging market powers.

Related link:
A cunning plan (ECB-IMF version) – The World (FT)
IMF replaces Europe director as debt crisis boils – Reuters