A proposal in Rome to issue small-denomination bonds to help pay back its debts could have disastrous consequences for the Italian economy, an analyst has told CNBC.
The Italian government is considering a proposal that would see the treasury issue securities — so-called mini-BOTs (short-term treasury bills) — that could be used by recipients to pay taxes or to buy goods or services from state-owned companies.
Supporters of the idea, including one of Italy’s ruling parties, Lega, believe the short-term securities would help the government reduce its outstanding bills. On the other hand, critics argue that it would lead to higher public debt in a country that already has the second largest debt pile in the euro zone.
Some traders have cited concern over these mini-BOTs as a reason for a rise in Italian government debt yields in recent sessions, according to Reuters.
Why are markets cautious about the idea?
“If Italy goes down that rout, it will in my opinion be a disaster for the country. You are going to have a loss of general confidence in the Italian debt in the markets,” Jacob Kirkegaard of the Peterson Institute for International Economics told CNBC last week.
The mini-BOTs discussion has also resurfaced fears about Italy’s commitment to the single currency. Prior to the general election in 2018, both coalition parties — the leftist Five Star Movement and the right-wing Lega, spread doubts about the country’s membership of the euro zone.
Since then, both parties have toned down their euroskepticism but one of the main economic minds from Lega, Claudio Borghi, is still openly hostile to the idea of the common currency.
“There are a number of economists, including influential ones close to the Italian government, who believe the euro is a key reason for Italian underperformance, and the leaders of the coalition have never fully put this idea to bed,” Erik Nielsen, group chief economist at UniCredit, said in a note last week.
“But given the influence in Rome of a number of people elected on a platform of resentment towards others (it’s the euro’s fault, Brussels’ fault, Germany’s fault…), who have mused publicly about former Greek Finance Minister (Yanis) Varoufakis’ plan of leaving the euro by first introducing a parallel currency, and even suggesting that mini-BOTs could be issued and then made into legal tender as a parallel currency, they have managed to attach a huge degree of stigma to the otherwise sound idea of addressing the public sector arrears via securitization,” Nielsen added.
What do the ECB and the IMF think?
Mario Draghi, the president of the European Central Bank (ECB) has directly addressed the proposals. He said in a press conference earlier this month that mini-BOTs “are either money and then they are illegal” or they are debt: “And then that stocks goes up. I will stop here,” he said, hinting at Italy’s lofty debt pile.
Also Christine Lagarde, the managing director of the International Monetary Fund, does not seem to be very fond of the idea. She told CNBC Thursday: “On this strange financial instrument that has been developed in Italy, we think that there are many better ways to deal with the payment of arrears. It does not require the creation of such instruments. Italian bonds could absolutely do the job … why bother?”
What are the chances that the idea will move forward?
It is unlikely that mini-BOTs will be issued for now. Firstly, if they are a currency then it would be deemed illegal, as Draghi suggested.
Nielsen from UniCredit also said that a parallel currency issued by the state rather than by a central bank would trade at a “steep discount to the euro” — making it less attractive for investors.
Overall, the discussion adds another layer of concern for Italian finances. Market players have been wary of developments in Rome since the anti-establishment coalition took power in June 2018 and vowed to increase public spending. The government’s plans for higher expenditure has also raised eyebrows at the EU, where the European Commission has questioned the stability of the Italian economy with its 2.3 trillion euro debt pile.