Relax! The IMF Won’t Save Europe But Maybe China Will

These markets are no different from tweenage girls, I tell ya! They love gossip too!

Yesterday, word got around that Italy might get a 600 billion EUR loan from the International Monetary Fund (IMF). Naturally, this sparked a broad risk rally and got the markets all riled up. But is there any truth to these rumors?

I hate to burst your bubble, but chances are that the answer to that question is a big, fat “NO.” The IMF simply doesn’t have the money to rescue Europe on its own.

Like Shakira’s hips, the numbers don’t lie. As of the end of September, the IMF’s funds totaled just 630 billion EUR. Of this amount, 160 billion EUR is dedicated to gold holdings and money that it’s already lending out. Adding to that, 145 billion EUR are already reserved for countries such as Poland that have existing credit lines with the IMF. And let’s not forget about the 45 billion EUR that the IMF keeps as a safety buffer.

Do the math and you’ll see that this leaves the IMF with just about 280 billion EUR for new lending. Do you think the IMF would loan out that entire amount to just one country? Hah! I doubt it!

Consider this: The 30 billion EUR that Greece is borrowing from the IMF is 24 times larger than the amount that it has contributed to the IMF. Needless to say, that was a very generous move on the IMF’s part. As a matter of fact, it was a record level. Assuming that the IMF extends the same generosity to Italy, it could eat up another 215 billion EUR of the IMF’s remaining facility. Basically, the IMF will be left with very little to help other struggling nations.

But you don’t have to take my word for it. An IMF spokesperson has already outright denied allegations that Italian officials are in talks with the IMF for more financing.

So who’s going to be Europe’s knight in shining armor? Don’t fret! While the IMF may not be capable of saving Europe, perhaps China is.

Yesterday, Chinese Commerce Minister Chen Deming said that the country is planning on investing in Europe. In 2012, a Chinese delegation will be sent to the region to examine where potential investments could be made.

You should remember that China has a few reasons to come to the euro’s rescue. For one, the bloc is its largest trading partner, taking up 20% of its total exports. I also think that by helping out the euro zone, it will be easier for China to convince European policymakers to allow bigger Chinese representation in the WTO, IMF, and World Bank.

However, don’t get too excited just yet. As I mentioned in one of my blogs before, only a very small portion of China’s 3.2 trillion USD foreign exchange reserve is highly-liquid. This means that even if China wanted to, it has a very limited amount of readily available cash in its pockets to dole out to the euro zone. Yikes!

We saw the euro rally strongly yesterday but it quickly reversed its gains. For instance, EUR/USD traded higher all the way up to 1.3400 but got rejected at the major psychological handle. The way I see it, the shared currency will only really be able to hold on to its gains if EU officials make concrete plans to solve the debt crisis. So ultimately, the survival of the euro will depend on Europeans themselves.

EUR/USD 15-minute chart

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>