Italy's Scary Parallel Currency Threat

(Bloomberg Opinion) -- It’s hard to think of a more important question for the future of the euro than how committed Rome really is to the single currency.

Italy is the third-biggest economy in the monetary union, and had the bloc’s largest public debt in absolute terms last year. The League and the Five Star Movement, which have run the country in coalition since last June, have excluded any reference to “Ital-exit” in their governing program. But since both parties toyed with the idea of returning to the lira during last year’s national elections, investors are naturally dubious about their true intentions.

This explains why a parliamentary motion on how the state pays the arrears it owes to commercial businesses, which Italy’s lower chamber passed last week, has caused such an uproar. The document invited the government to consider issuing small denomination bonds to help speed up its settling of debts. All parties, including the opposition Democratic Party and Forza Italia, voted in favor – the Democrats later disavowed the decision.

We shouldn’t get carried away, though, about this being a credible attempt to create a domestic alternative to the euro. In Italy, such parliamentary motions are symbolic and most lawmakers pay them little heed. This particular proposal was poorly specified too. It wasn’t clear whether these securities would be used as a medium of exchange (although that might be the hope of Italy’s euroskeptics). In any case, the finance ministry was at pains to explain that there were no plans to introduce the bonds, known as mini-bills of Treasury (or “mini-BOTs”). The creation of a parallel currency would be illegal under EU treaties, and would push Italy out of the euro zone.

Obviously, anything that even hints at the country leaving the single currency is taken seriously by international investors. An Italian exit, should it ever happen, would carry enormous financial implications for Rome and the rest of the world. Any asset owners would want to know it was coming well in advance to avoid being burnt.

The fear is that an Italian euro departure might be prepared secretly and announced abruptly. One would usually expect a government to hold a referendum on such a big decision, as Britain did on its EU membership, but Italy’s populists might be wary of that approach because of concerns that even announcing a vote may lead to bank runs and capital flight (which would no doubt scupper any “leave” campaign).

This is why the idea of mini-BOTs captures so much attention. In theory, they amount to little more than an accounting trick, whereby the government simply pays its obligations through another form of debt. The innocent argument for their introduction is that they should make it easier for companies to cash in their arrears, providing a liquidity boost for Italian business.

But with Italy’s commitment to the euro under such intense scrutiny, any whiff of it looking at alternatives will cause market anxiety. As Mario Draghi, the European Central Bank president, said of mini-BOTs on Thursday, “They are either money – and then they're illegal – or they're debt, and then that stock goes up,” adding that he could see no third option.

Of course, a way to end the uncertainty about Italy’s intentions would be for the populists to be much more definitive about the country’s participation in the single currency. Unfortunately, Matteo Salvini’s League has prospered from its ambiguity on the subject, which has allowed it to secure the votes of many euroskeptics. So long as it keeps that up, any suggestion of mini-BOTs will be an issue.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

©2019 Bloomberg L.P.

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