Italy’s Conte Calls for Joint Bonds Ahead of EU Summit Clash

(Bloomberg) --

Italian Prime Minister Giuseppe Conte joined a chorus of Southern European nations calling for the issuance of as much as 1.5 trillion euros ($1.6 trillion) of joint bonds to aid economies crippled by the coronavirus, setting the stage for a clash at a European Union summit this week.

Conte evoked the risk of market contagion if European leaders fail to act on pressure from Italy and Spain, according to a Sunday interview with Germany’s Sueddeutsche Zeitung. His words echo a warning from French President Emmanuel Macron last week that it’s necessary for the EU to “issue common debt with a common guarantee,” and that failure to rise to the occasion would lead to the bloc’s collapse.

Italy’s Conte Calls for Joint Bonds Ahead of EU Summit Clash

As EU leaders prepare for the virtual summit on Thursday, Conte is under pressure to obtain relief for an economy stricken by a nationwide lockdown, while countering pressure from populists in and outside his government who are lambasting the EU’s response. His approach is sure to be contentious as countries including the Netherlands and Germany categorically oppose any mutualization of debt.

“Our economic systems are connected with each other and interlinked,” Conte said. “When one country has problems, it triggers a domino effect and that’s something we should absolutely avoid. What’s needed here is the European Union’s full firepower -- namely through the joint issuance of bonds.”

Spanish Proposal

Spain proposed creating a European fund of as much as 1.5 trillion euros to tackle the recovery effort, according to a copy of the paper obtained by Bloomberg. The fund would be financed through perpetual EU bonds to keep national public debt levels in check. Grants would then be made to member states through the EU budget.

Spain’s economy could contract this year by more than 12% in a worst-case-scenario forecast by the country’s central bank. The economic shock could push the unemployment rate to as high as 21.7% this year, undoing gains achieved in the aftermath of the 2008 global recession. At nearly 14%, Spain’s unemployment rate is already one of the highest in the developed world.

Deaths in Spain leveled off on Monday, with 4,266 new infections in the last 24 hours, pushing the total above 200,000, according to Health Ministry data. The number of fatalities rose by 399, compared to Sunday’s 410, to 20,852.

European governments have already committed 3 trillion euros to cushion the blow from the pandemic, and “a lot more” will be needed, European Commission President Ursula von der Leyen said last week. The commission is working on a plan to expand the bloc’s budget to be “the mothership” of efforts to revive growth.

The commission plan falls short of what the Italians and Spanish are proposing, instead it would see the EU borrow money in the financial markets, backed by funds in the EU budget, which would then be distributed as loans to member states, according to a person familiar with the discussions. Repayments would likely happen after 2027, said the person, who asked not to be identified because the talks are private.

‘Bad Bank’

On another front, senior European Central Bank officials are advocating for a euro-area “bad bank” to take toxic debt off lenders’ balance sheets, the Financial Times reported Sunday. ECB officials have held talks about the idea with counterparts in Brussels, according to the report.

Conte said the European Stability Mechanism rescue fund, Germany’s preferred tool to address the economic impact, “has a bad reputation in Italy.” He added it’s not about pooling past or future debt but rather about “an extraordinary effort” to deal with the current situation, according to Sueddeutsche.

Klaus Regling, the ESM’s director-general, said concern that the fund’s lending will have two parts -- one to specifically deal with the outbreak, the other to reduce budget deficits -- was misplaced.

“I think that that’s a misunderstanding,” he told Italy’s Corriere Della Sera newspaper. “The conditions agreed at first will not change during the period in which the line of credit is available. The Eurogroup will clarify it, saying that the only requirement for obtaining the loan is the way in which they spend the money.”

Italy’s anti-establishment Five Star Movement, the biggest force in Conte’s coalition, has long campaigned against ESM credit lines as carrying a stigma and requiring unacceptable loan conditions. Opposition leader Matteo Salvini of the anti-migrant League, who has criticized the EU for failing to step up for Italy, also has denounced the ESM.

“I’m fundamentally skeptical toward the ESM as well,” Conte told Sueddeutsche.

©2020 Bloomberg L.P.

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