It’s a good thing the upbeat trade headlines out over the weekend have served to buoy sentiment to start the week, because folks are pretty damn concerned about the situation in Italy.
Jitters on Monday seem to center around the possibility that the populists’ “mini-BOT” idea (which amounts to the introduction of a parallel currency) will come to fruition.
If you’re not up to speed on this, these things are just Treasury bills that don’t pay interest. They’re backed by tax revenues and they would be an actual piece of
toilet paper, printed, appropriately, by Italy’s lottery’s ticket presses.
Far-fetched? I don’t know, maybe. Probably. But shit, you never know and for now, it’s weighing heavily on the front end:
“Historical experience shows that, in these cases, a country that adopts a double currency drastically damages its public finances, growth potential and stability”, outgoing Finance Minister Padoan said in February, when asked about this nonsense.
The idea here is that these are just claims on tax receipts so theoretically, those can be transferred and used to settle debts to the public sector.
“Basically the Italian government would mail you a certificate that says it’s worth a certain amount — and you can sell that if you want to get the money quicker,” Bloomberg’s Paul Doboson writes, adding that “it would be likely to trade at a discount to its face value in euros, in effect creating a parallel currency — particularly if people were to start using the new note as cash to exchange for goods and services, rather than using euros.”
To be clear, this isn’t a “new” idea and Italy’s populists have been talking about this for quite a while. History is replete with variations on this concept and amusingly, it seems like they might be taking their cues from Syriza v. 2015.
In other words, they seem like they might be leaning towards trying to Varoufakis some folks (and “Varoufakis” is being used as a verb there).
Or maybe not, because according to JPMorgan’s Gianluca Salford and Marco Protopapa, there’s a “low probability” of a “Varoufakis-style strategy of explicitly challenging the status quo from the beginning.”
“Any sustained move in that direction would likely be met by aggressive Italy underperformance versus other markets,” they continue.
Right. Or as Di Maio and Salvini call BTP underperformance: “blackmail“.
In any event, for now this is causing some pretty severe angst and the BTP-bund spread is now through 1.70: