Italy puts the fuse on the euro

Italien legt die Lunte an den Euro

 

13.06.2019 – Special report. The speculations about an Italian parallel currency simply do not cease. Is the Mini-BOT the preparer of a default and Italexit? Only in this way could Rome quickly and completely clear its debt. Italy owes the European Central Bank around half a trillion euros, i.e. 500 billion euros, via the indirect route of the Target2 balances. The temptation is great to let the euro bomb burst. That would be enormously dangerous for Germany, the entire euro zone and therefore the euro. We are analysing the background.

Expect the unthinkable

Italy has gone on a collision course with the European Union in two respects. Although the country has now given in to the deficit dispute with the EU in order to avoid a billion-euro criminal case, it has not yet done so. The Italian government insists that it can meet the deficit target of 2.04 percent, while the EU Commission expects 2.5 percent. But how will Rome get rid of its debts? In the middle of a recession, an austerity policy would be suicide for any government. The unemployment rate is 10.7 percent, Italy’s debt more than 130 percent of gross domestic product. As always, experienced CFD traders should also think through the unthinkable.

Time and again the parallel currency is tempting

Perhaps the only way to eliminate debt in euros is to switch to another currency. The second move towards the euro zone is therefore interesting – a unanimous decision by the Roman Chamber of Deputies at the beginning of June. The parliamentarians approved a motion that was not yet a draft law or a government decree. But certainly an interesting test balloon. In concrete terms: the government wants to issue short-term government bonds in denominations of 5 to 500 euros. Such small denominations are fatal reminders of real money.

Mini-BOT instead of Euro?

The bonds should be called Mini-BOTs – BOT is the abbreviation of “buoni ordinari del Tesoro”, i.e. treasury bonds. The maturities should be between three and twelve months in order to settle bills within Italy. In addition, Italians are to pay their tax debts to the tax authorities with mini-BOTs. And again we have important functions of a currency.
Italian government representatives recently emphasized that it was not a question of a parallel currency or the withdrawal from the euro. But perhaps this is just appeasing propaganda to lull the financial world. It is true that the Mini-BOT de iure is not an official currency – since Rome does not force anyone to accept the promissory notes. But de facto a second currency market would emerge alongside the euro if the critical mass of Italians using Mini-BOTs were large enough. Incidentally, second currencies are illegal under EU law. By the way, Mini-BOTs also further increase Italy’s indebtedness. So why take this step anyway? Maybe because the Italexit is to come after all and the investors simply don’t believe it yet.

Shock waves race through Europe

So what could happen? Since the process is almost unprecedented so far, only an attempt to analyze the history remains. On the one hand, Italy could simply explain a default for all international debts denominated in euros. The example of this: at the end of the 1990s Russia declared default on its bonds. In the case of Italy, the shock waves are likely to hit Germany in particular, the largest guarantor of the European Central Bank. German government bonds are likely to go down on their knees.

Italian government bonds in euros would also be a feast for the bears because of the default. A wave of collapses would also be expected among European banks in crisis – for they in particular would have to invest in bonds from risk countries because of higher yields. In addition, a mega-crash on the stock market and a bear market in the euro are likely to sweep over investors.

Example of hyperinflation in the Weimar Republic

Furthermore, Italy would probably immediately declare the Mini-BOT the new, only currency, albeit with a new name – which would immediately make the country interesting for investors, as it would be completely excused from external debt. There is a similar historical example: the Weimar Republic, crushed by gigantic debts, destroyed the loans of its creditors after the First World War. Germany unscrupulously apologized for the hyperinflation by paying off its debts in freshly printed and ultimately worthless marks in the course of the Ruhr War of 1923. Neutral states and above all the domestic middle class, which had subscribed to war bonds, were suddenly left empty-handed. When the new currency Rentenmark was introduced, the state was from now on almost debt-free and again an attractive investment location. The default risk for foreign investors had dropped to almost zero.
Immediately huge dollar flows flowed from the USA to Germany. Because America was swimming in money and looking for investment opportunities. It had supplied its allies, who had switched to war production – above all France and England – with a large proportion of its consumer goods during the First World War. This had led to a gigantic bull market on Wall Street in the “Roaring Twenties”. With the dollar influx, the Weimar Republic experienced a brief blossoming in the Golden Twenties. The parallel in the recent past: after the Russian crisis – and supported by the rising oil price – about 2000 billion Western funds flowed into Russia. The country boomed, the ruble recovered strongly.

Bull market in Italy and gold

The Italian stock market would therefore benefit enormously from the euro exit if new capital were to flow into the country. And of course the new currency would be worth a close look for traders, including government bonds. Since an escape from the euro would also set in – the example of Italy could set a precedent – many investors would probably invest their money in the safe haven of gold. Besides, a drastic fall in the value of the euro would only leave those who own tangible assets largely cold. Because home builders could pay off their mortgages more easily prematurely; and the bill would probably be presented shortly afterwards: In the Weimar Republic, real estate owners were asked to pay a house interest tax from 1924 onwards.
Our conclusion: Italy is growing into a trouble spot for the euro, which could make the Greek crisis look like child’s play. CFD traders should definitely take the matter on their radar screens. But if Rome has only shown its donors the tools of torture to obtain new loans via the ECB with the Mini-BOT, the muddling through will continue. New debts, little repayment, permanent crisis. Until the situation escalates as once in Greece. Let us wait and see.

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