IMF Denies 600 Billion Euro Italy Bailout Rumor

The International Monetary Fund (IMF) is denying rumors reported in Italian newspaper La Stampa that the IMF and the Italian government are discussing the possibility of a 600 billion euro rescue package. The interest rate on the 600 billion euros worth of funding was reported to be between four and five percent, which compares very favorably to the yields on Italian bonds that have climbed higher than seven percent. Italy has seen its borrowing costs surge to these unsustainable levels because investors fear that it could be headed down the same path as Greece. The timing of the rumor is suspicious because Italy plans to raise around 8 billion euros in the bond market on Tuesday. This is only the latest incident in which rumors of Italy benefiting from a large infusion of foreign capital have been dispelled by Italy's supposed savior. Rumors began swirling in September that China would begin to increase its purchases of Italian bonds in a move that would help drive Italy's borrowing costs lower and improve investors' confidence in Italy. However, Chinese Premier Wen Jiabao ended the rumors while he was attending the World Economic Forum when he said that European countries like Italy needed to "put their own houses in order" instead of hoping that China would bail them out. Early reaction to the 600 billion euro IMF rumor was positive but Italy could suffer in the long run if investors feel that the country is developing a habit of manipulating markets by spreading false rumors. ACTION ITEMS:

Bullish:
Traders who believe that Italy is about to receive a massive bailout might want to consider the following trade:

• The iShares MSCI Italy Index Fund EWI could move higher if the Italian government's funding situation improves.

Bearish:
Traders who believe that the IMF rumor was planted by the Italian government may consider an alternate position:

• The euro could take a beating if investors feel that eurozone governments like Italy's are going to start spreading false rumors to try to manipulate the market price of their debt. If this is the case, the ProShares UltraShort Euro EUO could rise.

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