November 10, 2018

Poor Italy! So squeezed between inept Brussels’ technocrats and their own redistribution profiteers.

Sir, I read Miles Johnson’s and Davide Ghiglione’s  “Italy’s welfare gamble angers Brussels and worries business” November 10, and I cannot but think “Poor Italy”, squeezed between inept Brussels’ technocrats and redistribution profiteers.

“Italy’s welfare gamble”? That welfare which Brussels’ technocrats, for the purpose of bank capital requirements have with their Sovereign Debt Privileges of a 0% risk weight helped finance? Italy’s public debt is now about €2.450 billion, meaning over €40.000 per citizen? 

That 0% risk weight is alive and kicking even though Moody’s recently downgraded Italy's debt to “Baa3”, one notch above junk status and that even though it might not have yet considered that the euro is de facto not a real domestic (printable) currency for Italy. If that is not a welfare gamble by statist regulators on governments being able to deliver more than the private sector, what is? Poor Italy.

But then I read about a government proposal that could increase welfare payments to poor and unemployed Italians to as much as €780 a month but which eligibility and distribution criteria remain unclear and again I shiver. That sounds just as one more of those conditional plans redistribution profiteers love to invent in order to increase the value of their franchise. Poor Italy. 

For me a way out that would leave hope for the younger generation of Italians would have to include a restructuring of their public debt with a big haircut for their creditors; hand in hand with an unconditional universal basic income, that starts low, perhaps €100 a month, so as to have a chance to be fiscally sustainable.

And if that does not help, then Italy will have to count (again… as usual) on its inventive and forceful strictly citizen based “economia sommersa”, something that is not that bad an option either.

PS. Oops! I just forgot that most of that Italy debt is held by Italian banks, so perhaps a type of Brady bonds EU version could be used. Like Italy issuing €2.4 trillion in 40 years zero-coupon debt, getting an ECB guarantee for a substantial percentage of its face value, and allowing banks in Europe to hold these on book on face value; all so that Italy can use it to pay off its creditors could be a shooting from the hip alternative… and then of course have all pray for some inflation to reduce the value of that debt.

PS. I am not the one first speaking about Nicholas Brady, then US Treasury Secretary, approach in 1989. Here is William R. Rhodes “Time to end the eurozone’s ad hoc fixes” in FT November 2012.

@PerKurowski