Italian Mini-BOTs Would Be Liability Swaps

In the last two weeks there has been a flurry of economic/financial writing about the Italian proposal for a parallel currency in the form of mini-BOTs by an Italian Lega politician, Claudio Borghi, who, as a former Deutsche Bank person, should understand the implications of a parallel currency deployment and who has been quite vocal in his desire to exit the euro.  Since Italy is the third largest economy in the eurozone, the impact would be significant unlike Greece.

Most of the writing has been monetarily critical --- concentrating on perceived debt increase to unsustainable levels and legality.  Papadia and Roth have tried to review the competing viewpoints through existing literature, but they omit the earlier 2015 Andresen and Parenteau electronic TAN proposal, which was the basis of the Varoufakis plan via Galbraith.  Papadia and Roth would have us believe the paper form would be better than the electronic form, because it would be less likely to be used criminally.  In fact, the electronic form is even less like currency, less expensive and simpler to implement, and not subject to counterfeiting.  Papadia and Roth make a good listing of what makes currency and what makes a security.  In their conclusions, they worry about the mini-Bot enabling an
increase in fiscal spending increasing the budget deficit (Bossone), but the mini-BOT is a swap of one government liability for another government liability; there is no increase in debt with its issuance.  This is the same mistake Cecchietti and Schoenholtz make in their conclusions, although they make a good study of the economic/financial problems which could develop if the mini-Bot was implemented without immediately leaving the eurozone with its destructive austerity budget rules.  Their Target2 liability concerns are misplaced as I have written in the past, although the myth persists.

Munchau gets the mini-BOT problem correct.  If Italy were to implement the mini-BOT without immediately leaving the eurozone, it would be economically and politically disastrous.  As a temporary instrument for a downward slope to exit, the mini-BOT could not escape the eurozone budget rules and the doubts of the international bond and banking market.  Borghi tries to be politically deceptive in a communication with Munchau, reported in the EuroIntelligence (subscribe to it here) on 6/10/2019, in which he attempts to assert the mini-BOT is a safety tool only:

        "Claudio Borghi, the Lega MP who invented the concept, responded to the article by saying that  he did not design them as an exit instrument but as a safety valve:

'The shortage of liquidity threatened by ECB in Greece has been performed without any kind of Grexit but in a shameful humiliation of democracy. I would like to avoid this to my country. That's why I say safety. Having the second wheel don't imply willingness to puncture a tyre.'"

His words in his published work (the proposal in the first paragraph) and speeches say otherwise.


For the mini-BOT to be implemented correctly, Italy would need to go all in implementing the mini-BOT at the same time it immediately withdraws from the eurozone, instituting simultaneous capital controls, redenominating all external debt into a new sovereign currency (or defaulting if creditors refused), renegotiating all bilateral trade agreements, etc.  Fiscally, domestic growth would need to be spurred using governmental expenditures on public and public-private investment, public infrastructure, R&D to promote import and export competitiveness, employment, and public welfare.

It would be political and economic suicide for Italy to attempt to do this within the eurozone as a bargaining chip.  Since Italy has a right wing populist government, they may not care if it leads to disaster within the eurozone.

The mini-BOT is a liability swap.  It can be a proper tool in exit or a disastrous tool if Italy implements while still in the eurozone.

6/18/2019
Varoufakis has published a parallel currency article explaining his concept would have been (correctly in my opinion) a temporary payments system unlike Italian proposed mini-BOTs.  He correctly (in my opinion) asserts mini-BOTs appear to be design to force the end of the eurozone.  He confirms my opinion that paper mini-BOTs would be vulnerable to counterfeiting, although he uses the nebulous "grey market" to include use as a means of exchange, which it is also designed to be. 

However, Varoufakis contend his parallel currency would have been not just a payments system but a means to remain in the eurozone with the euro.  As a temporary political economic tool during a political economic dispute and crisis, it may have been a process to resolution.  Unfortunately, politics does not always follow a rational plan and gets messy.  In his case, the plan was aborted. 

As I concluded above, if a parallel currency is to work, you have to go all in in one swift, well calculated play.


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