Gold and silver prices jump as IMF denies $800bn rescue for Italy and Spain

The International Monetary Fund has denied that it is preparing an $800 billion assistance package to backstop Italian sovereign debt as a lender of last resort after a report in La Stampa, with Spain also offered credit to fight off the bond vigilantes.

Financial markets had immediately rallied with the yellow metal and silver prices sharply up. This might have been the start of the money printing needed to bailout Europe and have bought the eurozone time to create more of its own institutional support for the euro.

Markets still held firm after the official denial on positive noises from eurozone leaders. You would think they would know better by now.

Greece still bankrupt

However, the quid pro quo is that the smaller eurozone nations may well still go bankrupt. Greece looks a slam dunk and Portugal and Ireland may have no alternative but to follow.

Italy and Spain would very much like to get access to cheaper credit to refinance their sovereign debt and that would sterilize their own bond markets where yields have become unsustainably high. The cost of the IMF assistance would have been spread among its member countries all over the world and that presumably is why it is not happening as yet

Plans are in still progress to increase the eurozone’s European Financial Stability Fund to possibly as high as $2 trillion and then to sell bonds in the fund to international investors. The next fortnight is seen as particularly crucial with Greek debt repayments due on December 17th, still a likely day for a final default.

Eurozone recession

The eurozone still faces a recession in the first half of 2012 that is probably too late to avoid, and some more severe turmoil in financial markets as a consequence.

The reaction in precious metal prices is a part of the general rallies to be expected in such volatile financial markets. But absent something big like an IMF rescue package this is not going to be sustained for long.

The OECD revisions to GDP growth outlook for 2012 are going to be far more influential in financial markets this week.