Enrico Grazzini
The most urgent task of the new Gentiloni government is to solve the serious problem of Monte dei Paschi di Siena and other banks with recapitalization troubles – such as Popolare di Vicenza, Veneto Banca Carige, Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara. Even the recapitalization of Unicredit, Italy’s biggest bank by assets, could be complicated. More broadly, the Italian banking sector bears the heavy burden of €360bn of non-performing loans, NP (ca 18% of total gross loans). Overcoming this problem is essential for the survival of the Eurozone: indeed, if the Italian banking system does not recover, it’s likely that the European banking sector as a whole will be badly affected and Italy could even leave the Eurozone. Given Italexit, the entire euro system would crumble. It is therefore essential for the Eurozone that the Italian banking system gets through this crisis and emerges healthily on the other side.
The market alone cannot solve all these problems. The Italian state must intervene, as has already happened in all the other eurozone countries and the UK and US. In December the new Italian government announced the creation of a public fund of some €20bn to rescue the bank sector. Of course, it would have to reach comprehensive agreement with the EU to overcome the severe (and in many cases counterproductive) constraints of the “state aid” rules: here, it is in the Eurozone interest that the Italian banking crisis does not trigger a European systemic crisis.
Although necessary, state intervention has three potentially negative aspects: 1) an increase in state debt; 2) the consequent need to offset that increase with spending cuts and/or tax increases. Both these countermeasures would have a severely depressing effect on the Italian economy, already beset by stagnation. The final downside is that 3) ultimately, taxpayers would pay for the weaknesses of the banking system for which they are not at all responsible.
The most useful instrument to avoid these negative consequences would be for the government to issue so-called Fiscal Money (FM). The FM is a bond that entitles the recipients to benefit from future tax cuts, e.g. two or three years after issuance. These bonds would be negotiable and immediately convertible in euros. Because these state bonds are fully covered by their fiscal value, they would be guaranteed securities and therefore very liquid on financial markets, like quasi-money. Moreover, since the FM entitles the assignee to a tax cut that cannot be refunded by the state at maturity (it does not count as a tax credit), it does not amount to government debt under Eurostat accounting rules.
How can FM be used to secure the banking sector? There are several workable ways that could be examined in depth while meeting EU/EZ rules. For example:
- The state could recapitalize the banks in crisis making use of FM and, at the same time, recapitalize Atlante – the private fund set up by the major Italian banks and other financial institutions – to reduce NPL levels and repair capital ratios.
- The state could act as a guarantor for the recapitalization of the banks and for the NPL sale.
- Cassa Depositi e Prestiti, the Italian semi-public financial institution, could recapitalize the banking system and get the huge amount of money needed to buy at fair price the NPL from the banks by issuing bonds with the option to be converted into tax rebates, with the prior agreement of the authorities.
- With FM the state could buy the bonds from the afflicted banks’ retail shareholders. It can buy these bonds at a fair value, without excessively penalizing investors. Then, the state could convert the bonds into equity to recapitalize banks.
These are the main viable solutions. However, solving the current banks’ problems makes sense only if the Italian economy finally enters the path of growth. But this is only achievable by raising aggregate demand, thereby increasing GDP and employment. So, a more comprehensive economic intervention is absolutely vital: but this could only be successful thanks to a massive issuance of FM to households, companies and public bodies. Otherwise, the recapitalization of banks would become a short-term patch-up.
Luckily, FM can be used to solve either emergency situations – as in the banking sector – and macroeconomic problems, both in Italy and in the other European countries. If the Italian government were to emit FM 20 bn into the banking sector, it could simultaneously issue FM of equal value as part of a multiannual program. The FM would be allocated free of charge for a variety of purposes: an increase in households’ income, corporate tax cuts, public investment, social spending, etc. The FM emission would quickly increase purchasing power and generate a rapid growth in consumption, investment, employment and GDP. The fiscal multiplier with it is greater than a conventional one applied in conditions of under-consumption, of largely untapped productive resources and near-zero interest rates. So, within a couple of years – when bonds mature – economic recovery will compensate for the potential fiscal deficit caused by FM. And the equities that the state has acquired in the banking sector could be sold at substantial profit.
