Italy has had preliminary discussions with the International Monetary Fund about financial support to cope with the euro zone's debt crisis, possibly co-funded by national European central banks, but no decision has been taken, several sources close to the situation said.
New Italian Prime Minister Mario Monti was briefing euro zone finance ministers on his fiscal plans Tuesday but the sources said no formal request for IMF assistance was expected before he presents his budget to the cabinet on December 5.
In Spain, the center-right People's Party (PP), which won a November 20 general election, is considering seeking international aid as one option for shoring up Madrid's public finances, according to sources close to the party.
The PP and the outgoing Socialist government denied there were any such talks.
The situation is complicated by the fact that center-right Prime Minister-elect Mariano Rajoy has not yet formed his government and will only take office around December 20, although he is expected to outline key economic plans on December 8.
A source familiar with both sides of exploratory talks between Italy and the IMF said high level discussions had been under way for weeks but had accelerated since last Wednesday, when Germany made clear the European Central Bank could not directly assist Rome.
Discussions are currently around a 400 billion euro contingency package. Italy has not filed a request but things are building in that direction, the source said.
That is more than the roughly $380 billion which the IMF currently has available to lend to all countries, although talks are under way among the G20 major economies on boosting the Fund's resources.
An IMF spokesman said in a statement: The IMF wishes to reaffirm that there are no discussions with the Italian nor Spanish authorities on any form of IMF financing.
The IMF has said talks with Italy concern fiscal monitoring, which Rome has requested as a way of building market confidence. IMF Managing Director Christine Lagarde said Monday on a visit to Peru that an IMF mission would visit Italy in coming days as part of intensified economic surveillance.
Officials at the Bank of Italy and the Italian Treasury said no request for financial assistance had been made.
SPAIN EYED TOO
An IMF source said the global lender intended to reach out to the incoming Spanish government as soon as its economic team was formed.
Another said the IMF's country teams dealing with Italy and Spain were primed for action and ready to push the button as soon as requests came in, which was always preceded by extensive preparatory talks.
Both euro zone states have seen their borrowing costs soar in recent weeks to levels around 7 percent regarded as unaffordable over the long term, and which drove Greece, Ireland and Portugal to request bailouts.
Between them, Italy and Spain need to borrow more than 500 billion euros next year to refinance maturing debt.
A senior European Union source said it made sense for both to seek outside support on a precautionary basis at a time when new leaders can blame the stigma on their predecessors and use strict IMF conditionality to help implement unpopular policies.
Former Italian Prime Minister Silvio Berlusconi said IMF Managing Director Christine Lagarde had offered him a 50 billion euro precautionary credit line at the Cannes G20 summit on November 3. Lagarde denied having made any offer, but EU officials confirmed that Berlusconi and European authorities had rebuffed the idea as insufficient.
Sources close to the IMF board said there were discussions including large emerging nations on the possibility of providing about $400 billion in additional resources to the IMF, but they cautioned that this was not all intended to help wealthy Europe.
The IMF could contribute about 100 billion euros to a package for Italy, while the euro zone's rescue fund and national central banks affiliated to the European Central Bank would provide 300 billion euros, lent to the IMF.
Asked about those figures, the IMF board source said: That makes sense.
Italian daily La Stampa reported Sunday that the IMF was preparing an aid package of up to 600 billion euros at a rate of between 4-5 percent to give Italy breathing space for 18 months. That too was denied by Italian and Fund officials.
The proposed approach would put the IMF, seen as a more credible disciplinarian than the European Commission, in charge of the program. It also reflects resentment in Italy's political elite at the dominance of France and Germany in the euro zone.
The exact nature of the credit - a traditional standby credit line or a precautionary credit line - remained to be determined, the source said, but Monti favored a program with conditions.
Italy accelerated the IMF talks after the European Central Bank and Germany made clear last week they would not support Rome directly, the IMF source added.
But Italian officials questioned the point of a rescue plan for Italy alone when the whole of the euro zone is at risk.
The EU official said it made more sense for both Rome and Madrid to receive precautionary support, potentially involving the euro zone's rescue fund providing partial insurance for their bonds alongside the IMF-supervised credit.
Reuters reported exclusively on November 17 that euro zone and IMF officials have discussed the idea of the ECB lending to the IMF, to provide the fund with sufficient resources for bailing out even the biggest euro zone sovereigns.
However euro zone officials said Tuesday this would only be a last resort.
If Italy gets into trouble, euro zone countries can decide to increase the resources of the IMF to provide money for the bailout, and they can do that through national central banks, who would simply print the money, one euro zone official said.
This idea has been discussed, but it is in the background, it is not the main scenario, the official said.
A second euro zone official said the loans could be channeled to the IMF through the New Arrangements to Borrow.
The gambit could be a way of getting around legal restrictions on the ECB financing government borrowing or lending to the EFSF rescue fund.
Economists say only the ECB now can offer a credible guarantee to markets, as plans to leverage the firepower of the euro zone's EFSF rescue fund to 1 trillion euros are unlikely to fully materialize or, even if they do, to be sufficient.
The bank has repeatedly said it cannot become the lender of last resort to euro zone governments, which should first of all change policies that created large public debt and slow growth.
France has openly called for the ECB to get more involved by issuing the euro zone bailout fund - the European Financial Stability Facility (EFSF) - a banking licence that would allow it to refinance itself with the ECB liquidity operations.
Yet Germany opposes such an idea, fearing it would lead to financing government deficits, endanger the ECB's independence and in the end lead to higher inflation, which would make all euro zone citizens poorer.
(Additional reporting by Daniel Flynn in Paris, James Mackenzie in Rome, Elizabeth O'Leary and Fiona Ortiz in Madrid, Luke Baker in Brussels; Writing by Paul Taylor, editing by Mike Peacock)