_ Domenico Mario Nuti, professor of Comparative Economic Systems, Faculty of Economics, University of Rome ‘La Sapienza’. 8 August 2019. Published for debate.
The possible issue of an Italian parallel currency, first advocated by Professor Borghi in 2012 for a gradual exit from the Eurozone, has been debated extensively in the last year as a way to reduce public payment arrears to the private sector without raising public debt. In this article it’s argued that a dual currency, in the form of Treasury Bonds in small denominations – MiniBots – is illegal, dangerous in its impact on Italian interest rate spread, and unnecessary for the reduction of public payment arrears.
With two Eurosceptic parties – the Five Star Movement of Luigi Di Maio and the Lega of Matteo Salvini – forming a government under Premier Giuseppe Conte just over a year ago, proposals for the introduction of a parallel Italian currency have become more and more frequent.
Originally the dual currency was put forward as a way to organise the gradual exit of Italy from the Eurozone, by Claudio Borghi, a successful financial speculator, during a 2012 conference organised by Professor Alberto Bagnai of Pescara University. Both Bagnai, now a Lega senator and President of the Senate Committee for Finances and Borghi, then an economic advisor to Matteo Salvini and now a Lega Member of Parliaament and President of the Chamber Committee for Economics, were Eurosceptics and advocated the Italian exit from the Eurozone (variously labelled as ‘Exitaly’, ‘Italexit’ or, as it was recently called by The Economist, ‘Quitaly’). Both regarded EU and EMU deficit and debt constraints, quite rightly, as major contributory causes of Italian recession and stagnation, especially in view of the austerity policies embodied in those constraints. Thus, the media hastened to associate Bagnai with the dual currency proposal – wrongly and most unfairly since Bagnai never advocated a dual currency, favouring an instantaneous, rather than gradual, changeover instead.
The dual currency then became part of the Lega-Five Star joint programme that combined those policies shared by both parties and enshrined them in a quasi-‘contract’, but only as an instrument to reduce the backlog of arrears in the payment of debts incurred by the government and other public debtors towards private creditors.
As in the case envisaged for Quitaly, the issue of the European Central Bank’s statutory monopoly of currency was expected to be circumvented by the issue of government bonds like the BOTs (Buoni del Tesoro) issued by the Italian Treasury, but in low denominations – hence the nickname MiniBots. Borghi kept promoting them both as ways to implement a gradual Quitaly and as instruments for reducing public arrears towards the private sector without raising public debt.
Last March a parliamentary motion contemplating the issue of MiniBots was approved in principle, without stipulating actual details, conditions and amounts. Successive discussions about Quitaly and arrears, and above all the rise and maintenance of the spread between interest rates for long term Italian BOTs and German Bunds, led to afterthoughts so that the motion was never finalised or substantiated.
In the context of discussions about the possible opening of a disciplinary procedure on the Italian next budget Law (DEF) the issue and circulation of MiniBots was repeatedly declared to be either illegal as a dual currency or subject to the same constraints applyied to any debt instrument used to finance government deficits. This is the line unanimously taken by many authoritative European and Italian officials, including: Mario Draghi, EU Commissionary Moscovici, European Parliament President Juncker, the European Council President Tusk, IMF General Secretary Lagarde, the governors of the Dutch, the Austrian, and the Italian Central Banks, the President of Italy, the Italian Confederation of Industry, Premier Conte and his Finance Minister Tria, and many other officials and politicians.
Under the weight of this kind of pressure, Lega MP Giorgetti, currently Undersecretary of State for the Council of Ministers and designated unsuccessfully by Premier Conte as a candidate to the Presidency of the European Parliament, declared that the issue of MiniBots was ‘inverosimile’ (unlikely, unrealistic, out of the question) and quipped “nobody is still listening to Borghi, he is old news and nobody wants to get out of the Eurozone anyway”.
Both Salvini and Di Maio commented that MiniBots were one of the joint policy commitments stipulated in their quasi-contract and they had been approved in a parliamentary motion; if people had changed their minds they would like to hear their reasons. However, Salvini appeared to reduce his earlier emphasis on MiniBots, by adding that they were only one of several proposals under consideration to reduce payment arrears. Many observers dismissed the softening of both Giorgetti and Salvini as instrumental in ingratiating European Parliamentary support for Giorgetti’s candidature to a major EU office, but others interpreted their pronouncements as evidence of a split, not only between Salvini and Di Maio (especially in view of Salvini’s renewed emphasis on the Flat Tax and their squabble about its fiscal feasibility and that of Di Maio’s minimum wage), but also within the Lega itself, with some members in favour of and others opposed to MiniBots.
Borghi simply shrugged off Giorgetti’s quip about MiniBots being ‘inverosimili’ by saying that it had been meant as a joke, and insisted that the proposed instruments were legal and effective both as a dual currency and a way to reduce arrears without raising public debt. MiniBots, not having been confirmed in their details, conditions or amounts, at present remain a vague possibility in suspended animation.
I have always been opposed to dual currencies, an opposition rooted in the study of the Soviet experience of currency stabilisation via dual chervontsy in the transition between War Communism and the New Economic Policy around 1922-1925, as well as a remedy applied in the Post-socialist transition of the 1990s via Currency Boards or other forms of dollar/DM-isation, or the dual currency occasionally mooted in the depth of the European debt crisis of 2007-08.
A dual currency issued at a fixed exchange rate with the old currency is subject to Gresham’s Law, under which the bad currency (overvalued with respect to relative purchasing power) chases away from circulation the good (undervalued) one. A dual currency exchanged on floating market terms generates uncertainty about its future value, causing an interest rate spread to arise between the two currencies.
An economy in full control of its monetary and fiscal policy can do much better by other stabilisation policies, while sticking to a single currency. However I also readily accept that a country whose debt was denominated in a foreign currency (as the Euro is for individual members of the Eurozone to all intents and purposes) could and in some circumstances should facilitate the recovery of monetary and fiscal sovereignty, if and only if they wanted it to do it gradually, through the adoption of a dual currency.
The trouble with MiniBots is that of course the ECB statutory rules, fully endorsed by Eurozone members before their membership, naturally make them illegal. And all net issues of debt instruments of any kind, ipso facto, automatically raise the stock of public debt. This holds also for MiniBots issued for the sole purpose of the reduction of arrears: even if they were legal, MiniBots could not avoid raising public debt. First, although the debt increase is extinguished when they are spent in the payment of taxes or the purchase of goods and services from the public sector, at the same time their expenditure lowers by exactly the same amount in public sector revenue and therefore raises its borrowing requirements, thus contributing to raising the debt. As a corollary, if MiniBots are extinguished through their acquisition by the public sector, obviously they can never play the role of a parallel currency meant to replace the old one in monetary circulation. But the very mention of MiniBots alarms investors unnecessarily, thus provoking automatically, though wrongly, sales of government bonds and the rise and permanence of the interest rate spread in the rollover of government debt which is about €400 billion a year. (Here the absurdity of issuing suitcases stuffed with low denomination MiniBots to private creditors only to have them delivered unopened to public debtors is left aside, but should also be considered).
Second, it is true that MiniBots, unlike ordinary BOTs, do not entitle holders to an interest rate. But the interest saved on their issue is more than offset by the increase in interest cost on the issue of that part of gross debt repaid at maturity but reissued by the Treasury. The interest gain on roughly 0.5% of GDP would be obtained at the expense of an interest increase on something approaching 4% of GDP, which should be deducted from the gain, making it negative unless the interest rate rises by more than 800% with respect to its earlier level.
Finally, MiniBots are neither necessary nor sufficient to reduce payment arrears owed by the public sector to private agents. MiniBots could only be issued to repay certified credits towards the private sector, i.e. included in the debtor’s balance sheet and duly approved, satisfying all requirements for the award of the underlying contract, from anti-mafia rules to size, technical qualifications, and experience of the enterprises awarded a contract, as well as publicity and competition. But in order to pay such certified credits the public debtors since 2012 have been given access to finance from a public agency (the Cassa Depositi e Prestiti) at a token interest cost, while certified creditors could always use them as collateral to obtain credit from commercial banks, at a rate that would not necessarily be significantly higher than the rate at which MiniBots may have to be discounted anyway in order to convert them into cash. Moreover, payment arrears in certified credits have been greatly reduced since 2012, with central government, public enterprises, and major cities now satisfying on average the new statutory maximum waiting period of 48 days between certification and payment. Apparently, the Ministry of Labour and Development is the fastest payer (five days), while the Ministry of the Interior is the slowest payer, with an average waiting period 35% longer than the norm. If Salvini really wanted to reduce the backlog of arrears he could simply issue an internal memo instead of MiniBots. It is true that some cities like Naples, parts of the South, and National Health Agencies grossly exceed the norm, but even their backlog has shrunk (all figures quoted here are from official ISTAT data).
Public payment arrears began to build up during the 2007-2008 European crisis and especially with attempts at reducing the government deficit calculated on a cash instead of an accrual basis in order to comply with EU and Eurozone constraints, has been reduced from about €120bn to about €50bn. But this is still too high. MiniBots would be of no use in this case: for them to be used in settlement, those credits must first be included in the appropriate balance sheets and then subjected to certification procedures. This is the responsibility of each debtor agency, there is nothing the Treasury can do about it.
In conclusion, MiniBots are useful, indeed necessary in a gradual exit from the Eurozone, but precisely for this reason they have been made illegal. In any case they are either a dual currency, unnecessary when Quitaly is no longer seriously advocated, or a debt instrument subjected to EU and Euro constraints, not both: tertium non datur. For the clearing of public debt towards private creditors, MiniBots are unnecessary for certified debts/credits, useless for non-certified ones.
Instead of pressing for a few additional decimals of GDP in deficit and debt targets, government negotiations with the EU and the ECB should press for the recognition that the reduction in public payment arrears involves only a change in creditors, from government suppliers to those who acquire the bonds issued to repay them. Consequently, as they do not raise overall debt, they should not be included in calculating the deficit. In the last couple of years, I have been proposing this approach repeatedly in public lectures and seminars (including a seminar at the Chamber of Deputies) and on various blogs, but the proposal has fallen on deaf ears. Repetita juvant. Maybe now that the problem has captured public attention and concern this possible change might be reconsidered.