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Europe agrees on EFSF; IMF may aid Italy: Reports

Europe agrees on EFSF; IMF may aid Italy: reports
Germany, France study ways to deepen fiscal union

By Michael Kitchen, MarketWatch

LOS ANGELES (MarketWatch) — European officials have reportedly agreed on how to leverage a key rescue fund, while a separate news report said the International Monetary Fund may act to backstop Italy.

Finance ministers from the euro zone are slated to meet Tuesday and expected to sign off on rules for borrowing against the European Financial Stability Facility (EFSF), as well as guidelines for intervening in the euro-zone bond markets and providing credit lines to governments, according to a Reuters report Sunday.

Such an agreement would mark a key milestone for the 440-billion-euro-strong ($586 billion) EFSF, after European leaders agreed to leverage the fund last month.

The reports on the EFSF deal came amid reports that the IMF may offer €400 billion to €600 billion in aid to Italy, Dow Jones Newswires reported Sunday, citing an unsourced account in Italy’s La Stampa.

La Stampa said the funds would be offered at 4%-5% interest.

Such aid would give Mario Monti, Italy’s new prime minister, 12 to 18 months to pass austerity measures meant to bolster market confidence in Italian finances, the report said.

However, a subsequent Dow Jones Newswires report Monday cited unnamed people familiar with ongoing European debt talks as saying La Stampa’s report wasn’t credible.

An IMF inspection team is due in Rome in the coming days, according to Reuters.

Deeper union?

As for longer-term measures, French and German officials were discussing deeper financial integration among members, Reuters said in a separate report.

Due to difficulties in amending European Union treaty language, the effort may focus on securing agreement that would involve only those EU nations which use the euro.

“The goal is for the member states of the common currency to create their own Stability Union and to concentrate on that,” Reuters cited German Finance Minister Wolfgang Schaeuble as saying in a television interview with ARD on Sunday.

“Germany is pressing hard for tougher budget rules. ... It requires real sanctions, tighter than the ones Germany and France wiggled out of a decade ago. This is nothing less than a new dimension to the governance of the euro zone,” analysts at Brown Brothers Harriman said in a note Monday.

Worries about Europe had intensified Friday after Standard & Poor’s downgraded Belgium’s sovereign credit rating, citing difficulties for the government there in reducing its debt. See report on Belgian downgrade.

Belgium, Italy, Spain and France all have government debt auctions slated for the week ahead, with the markets likely to watch the results closely to monitor pressure on those nations’ borrowing ability. See report on upcoming European bond auctions.

Asian stock markets — the first major bourses to trade following the weekend news on Europe — rallied on hopes that the euro zone was making progress on containing its long-running crisis.

In late morning trade, Japan’s Nikkei Stock Average and Hong Kong’s Hang Seng Index each traded 1.8% higher.

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