Beware the arrival of the mini-BoTs. No, it’s not the latest sci-fi film, but the reaction of the markets to the prospect that the new populist government will launch something akin to a parallel currency, as part of a drive to push up spending.
Italian government bond interest rates rose sharply on Monday and the Rome share market fell as investors start to focus on the risks from the incoming administration of the populist Five Star Movement and the right-wing League, who have promised to spend more and boost growth, ignoring EU budget rules.
The two parties have set out an agreed programme which promises to boost spending, notably in welfare, introduce a minimum income, abandon pension reform and shake up the whole tax system, including the introduction of a new flat tax rate for personal taxpayers.
Securities
Part of their plan is to use a new form of short-term securities to pay overdue tax rebates and state suppliers – the controversial mini-BoTs plan. ( BoTs are the name for existing Italian short-term government securities) The incoming administration denies that this is a new currency being introduced by the back door, but the rest of the euro zone will fear its consequences.
With analysts calculating the annual cost of the new programme commitments, when fully implemented, at well over 5 per cent of Italian GDP, or north of €100 billion, analysts are sceptical that much of this can be achieved. The reaction on financial markets may, in itself, hem in the new government.
The two parties have been vague of how costs will be met, promising savings and the abolition of tax breaks and saying faster growth could pay the bills. They have also called for a widescale loosening of EU budget rules.
Turmoil in Italian markets and its banking system were it to appear, could lead to wider strains in the euro zone. Italy has the second highest debt-to-GDP ratio in the EU behind Greece – at 130 per cent – and while some three quarters of this is owed to Italian investors, it is still a big euro zone player.
Illustrating these wider fears, the French finance minister Bruno Le Maire said at the weekend: “If the new government takes the risk of not respecting its commitments on debt, the deficit, but also on consolidation of banks, then the entire financial stability of the euro zone will be threatened.”
Much of the attention will focus, in the short term, on the proposal by members of the new government to pay delayed tax rebates, a big issue in Italy, and bills from suppliers of goods and services to the state with new, small denomination securities – the so-called mini-BoTs. The concept is that the government would effectively securitise the debt – relying on future tax revenues to meet the cost.The money would be paid in printed form, using the national lottery presses.
Services
Those in receipt of these securities would be able to " spend" them buying state services, of which there are many in Italy. The private sector would not be obliged to accept them, though they could then develop more widely into an acceptable means of exchange, probably trading at a discount to face value. Outgoing economy minister Pier Carlo Padoan described the proposal as "a plan to circulate a disguised parallel currency." California briefly did something similar during a financial crunch in 2001.
This will set all kinds of alarm bells ringing among other euro zone members, in the ECB in Frankfurt and the European Commission in Brussels. A new government in one of its biggest member states is threatening to play fast and loose with EU budget rules and introduce what could develop into some kind of parallel money in its economy .
The new government denies that this is the back door to a new currency, or will increase the national debt – and insists that it is just issuing securities based of future tax receipts.
Critics fear it is a way of paying for new spending and could, in time, pose a threat to Italy’s euro membership. Plans floated during the general election to have a poll on euro membership, or seek a national debt write-down are not in the new government’s programme. Nonetheless, controversy lies ahead.
How far these plans will go remains to be seen, but we can expect the euro zone big guns to be aimed at Rome in the days ahead, with warnings ramped up about what is being planned.
