Italy warns of costs of second bailout for Spain on its economy

A team of experts from the IMF on Monday arrived in Madrid to oversee the recapitalization of the Spanish banking sector for which the government of Prime Minister Mariano Rajoy will receive up to 100 billion euros as Italy warned of the potential impact on its economy of a second bailout for Spain.

In an interview with La Repubblica published Monday, Italian Finance Minister Vittorio Grilli said that if Spain were to ask for a further 100 billion euros from its European partners, this would shave 1.5 percent off Italy’s economic output.

“Italy will bear the worst part of the cost,” Grilli said. “If Spain were to obtain assistance for an amount no less than 100 billion euros, Italy’s contribution would be equivalent to 1.5 percent of GDP,” the minister added.

Whilst acknowledging the need for solidarity, Grilli said Italy needs to evaluate the impact of European assistance on its public finances, noting that the country’s debt had risen four percentage points as a result of the rescue packages for Greece, Ireland and Portugal.

Grilli said Italy has no plans to seek assistance from the European rescue funds, the EFSF and the ESM. “The country’s finances are solid. We will achieve the target of a balanced budget, adjusted for the economic cycle, next year without any aid.”

Italy’s contribution would be equivalent to 1.5 percent of GDP”

The Rajoy government has said that if it opts for a second bailout, it wants guarantees that the European Central Bank will intervene in the secondary market to bring Spain’s risk premium down to 200 basis points and maintain it at that level. In mid-afternoon trade, the spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent was up eight basis points at 425.

The team of experts from the IMF will be in Madrid until October 26, with the IMF insisting that their duties will be confined to supervision of the banking sector reform.

The official stance of the IMF is that it is up to individual countries to decide whether or not to seek a bailout. However, in its latest World Economic Outlook report released last week, the agency said: “While economies in the periphery must continue to adjust their fiscal balances at

a pace they can bear, it is essential to ensure their access to funding at reasonable cost. Common resources can be channeled via the EFSF or the

ESM—and countries in need should request those resources, with the goal of preserving or regaining market access.”