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Waiting for the Cavalry

"The International Monetary Fund is being lined up potentially to help Italy and Spain amid growing fears that a European rescue scheme will not be able to prop up the countries." The size of the package is given at US$800 billion.

Reports in Italy suggested that the IMF is drawing up plans for a €600 billion (£517 billion) assistance package for the country. Spain may be offered access to IMF credit, rather than a rescue package, to avoid it being “picked off” by the markets in the coming weeks.

The United States is the largest contributor to the IMF, with 17.72% of its shares, two and half times the next largest, which is Japan. By those proportions the American share in the assistance package would be on the order of $141 billion.

The reports of an IMF rescue package being prepared come as European finance ministers meet tomorrow to discuss draft plans for a bail-out scheme.

Under the scheme set to be discussed, the euro area’s European Financial Stability Facility (EFSF), would have to “insure” bonds of troubled countries by covering the first 30 per cent of any unpaid debts.

To offer this guarantee, the European bail-out fund would have to be able to raise €1.4 trillion – a threefold increase compared to the current size of the scheme.

News that the IMF was riding to the rescue of Europe pushed the Euro higher, Bloomberg reports. "The euro rose 0.6 percent to $1.3322 as of 6:31 a.m. in Tokyo from $1.3239 on Nov. 25, when it completed a 2.1 percent weekly decline."

The IMF money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement policy changes without having to refinance the country’s existing debt, the Italian daily reported. Monti could draw on the money if his planned austerity measures fail to stop declines in Italian debt, La Stampa said.

But even as the Europe hearkened to the distant bugle calls of cavalry some three ridges away, the metaphorical Indians were circling around the beleaguered EU wagon train. Sources at the Union Bank of Switzerland warned that markets were already measuring the Euro for a coffin. "Markets are 'pricing in the endgame' for the euro as the situation moves faster than politicians can act, UBS has warned ahead of a key meeting between eurozone leaders and US President Barack Obama."

EU leaders are arguing that Europe is doing it's part in the debt crisis, but is America?

The central message they will take to the Oval Office, said the ambassador, is “Europe is doing its homework. Individual countries are doing their homework. They are painfully implementing measures that are not politically easy.”

In return, of course, the president can expect the visiting leaders to ask him what he is doing on this side of the Atlantic to match the European actions. Many of them were dismayed at the debt ceiling debacle. And nothing that occurred with the supercommittee did anything to allay their concerns.

In order to make allowances for American insularity, the Europeans will be at pains to educate American policymakers on the nuances of the continent. "With a multitude of actors on the national and European level, the EU governing system can appear to outsiders like a mind-boggling maze."

"It's kind of like a state, but it's kind of not. It's kind of an international organization, but it's kind of not," said Tyson Barker, director of the transatlantic relations program at Bertelsmann Foundation, a think tank.

"We talk about the EU as an economy sometimes, but then we talk about France, Germany and its individual components. It's a very hard concept to grasp in the United States."...

Republicans in Congress have also voiced concern about bailing out profligate Europeans with US taxpayer cash via the International Monetary Fund.

Representative Cathy McMorris Rodgers, a party leader, called on Obama last month to veto any new IMF aid to the EU.

Meanwhile, Europeans are growing tired of what they say is finger-pointing by a nation that is itself weighed down by $15 trillion of debt.

"It's always much easier to give advice to others than to decide for yourself," German Finance Minister Wolfgang Schaeuble said in September.

Ambrose Evans-Pritchard says there is evidence that some officials in America may believe the cavalry should ride harder to the rescue.  He quotes Nobel economist Myron Scholes, who said over lunch at conference held in August.  "I wonder whether Bernanke might not say that `we believe in a harmonized world, that the Europeans are our friends, and we know that the ECB can't print money to buy bonds because the Germans won't let them. And since the ECB will soon run out of money, we will step in and start buying European government bonds for them'. It is something to think about."  And Bernanke has been thinking on just this problem for some time now.

Ben Bernanke touched on the theme in a speech in November 2002 – “Deflation: making sure it doesn't happen here” – now viewed as his policy `road map' in extremis.

"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations," he said.

The European leaders were expected to make their pitch to President Obama at the EU-US summit when he meets with European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso and EU foreign policy chief Catherine Ashton. Barroso, a former Maoist, will be familiar with Marx's observation that history tends to repeat itself, "the first time as tragedy, the second time as farce". And this latest episode is nothing but pure farce.

The return of the financial crisis in the shape of the meltdown of the Eurozone presents the world with the extraordinary spectacle of Europeans appealing to an American sense of responsibility. One is tempted to use the word "white guilt", except this time the petitioners are white and President Obama is black.

But these details are of no importance. The only thing that counts is that Europe needs saving! And it illustrates an invariant truism: if Europe isn't saved, it will be America's fault. And, oh, how's that cavalry coming along?


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