THE HUGE CRITICAL ISSUES OF THE SECOND LITURRI MONTH ON STARTMAG and our premise
We would like to offer you almost the entire article that appeared on Startmag by the always excellent Giuseppe Liturri , who followed the problem in depth.
We want to integrate what Liturri says with some sentences. The use of the “Ordinary” MES is linked to the “Non-access to market instruments”. Given that the BTP currently has an excellent market, it sells very well with very low returns, it might seem that what Gualtieri says, that signing does not mean use, yes it is true. In reality, to send the BTP out of balance and out of the markets, as demonstrated last March, a gaffe, perhaps deliberate, by Lagarde would be enough. That the President of the central bank says, for example, "That due to the growth of the debt and the Italian economic crisis we will see an increase in yields, but that the ECB has reached the limits of the Capital Key (that is, of the purchases of securities per country) ”, To send our debt with skyrocketing returns and make it difficult to place it. Perhaps all accompanied by a letter from the Commission on excessive debt, which was present as far back as 1993, and here we have the conditions for the preventive default of the debt and everything that follows.
And now Liturri and Startmag
There are two key changes to this reform:
1) If our country loses access to the markets and was therefore forced to resort to the ESM loan, it would be directed, ex-ante automatically according to quantitative parameters, to the credit line under enhanced conditions and, at that point, the cleaver of the debt sustainability assessment could easily decree the need for a restructuring, also facilitated by a single vote of creditors for the entire stock of bonds.
2) Alongside this time bomb, now wisely placed in the background, the reformed ESM would contain, two years earlier than expected, the famous "backstop", that is a loan of approximately 68 billion to the Resolution Fund single for banking crises (SRF), in case of inability of the latter.
The president Giuseppe Conte from 21 June 2019 is entrenched behind the "package logic". Reiterated in the parliamentary resolution of 11 December 2019, which committed the government to: "maintain the logic of the package"; “Exclude restrictive interventions on the holding of sovereign bonds by banks”; “To ensure the full involvement of Parliament in all stages of the negotiations on the future of the EU and on the conclusion of the ESM reform”. But, quoting Abraham Lincoln , "you can deceive everyone for some time and someone forever, but you cannot deceive everyone forever". This promise no longer holds and it may have been the French Finance Minister Bruno Le Maire who reminded his Italian counterpart Roberto Gualtieri on Thursday 26, just in time for the following Monday Eurogroup (and that's saying something!) the thanks of the French .
Evidently, as reported by Ansa, citing "European sources preparing the Eurogroup on Monday" ("I have no reason to expect that the political commitments made by Italy a year ago on the ESM reform are not reliable": "the text is closed and now we expect everyone to respect the political commitment made, and that this is also reflected in the national procedures ") has had its effect.
The facts show that, despite all the proclamations by Conte and Gualtieri, formally respectful of the will of Parliament and the Moavero Law (n.234 of 2012), they have chosen who to deceive, relegating the resolutions to the role of a dead letter of Parliament.
The betrayal of the parliamentary mandate lies precisely in the disappearance of the "package", of which Gualtieri instead claimed, with unusual boldness during the parliamentary hearing on Monday 30 , the respect. With two serious omissions regarding the other two elements of the package (in addition to the ESM reform):
- Banking Union means completing the third leg constituted by the common deposit insurance scheme which has instead been “blocked for months” as the Spanish Economy Minister Nadia Calvino stated yesterday to the Catalan daily La Vanguardia. Gualtieri cannot hide behind the fig leaf of the simple proposal of those arguments or the establishment of the parachute loan for bank bailouts: package means that either there is agreement on everything or there is no agreement.
- The Bicc (budgetary instrument for convergence and competitiveness) was canceled in July by the Next Generation EU and therefore Gualtieri claims to have done better. Correct. It is a pity that – as can be inferred from articles published in Bloomberg and Financial Times – Merkel now despairs of bending the resistance of Poland and Hungary and the probability that the plenary session of the European Parliament scheduled for December 14 will not be able to approve the NGeu is high. and postpone everything to January.
The Bicc is not there and neither is the NGEu. A shrewd negotiator should never have accepted the ESM reform, without having the certainty of the NgEu.
The same former Minister of Economy, Giovanni Tria , recalled in the Sole 24 Ore of 1 December 2019 : "The" statement "of the Summit (of the previous June; ed.) Specified, moreover, that, as requested by Italy, in the following months the negotiations should have continued following an overall approach in a "package" logic with reference to the three areas outlined in the previous December – revision of the ESM Treaty, introduction of the budgetary instrument for competitiveness and convergence (so-called Budget of the Euro Area ) and the Banking Union, including European Deposit Insurance (EDIS). In other words, it was required that the final agreement should concern the "package" as a whole. I have the impression that the negotiations have not advanced very far in these other areas ”.
So far we have reasoned in the method. Now let's face the merit.
The support of the ESM would be based aborigine on a distinction between good and bad, with Italy relegated to the group of bad guys precisely on the basis of those parameters (Stability Pact and Fiscal Compact) which are fortunately suspended due to the pandemic and which seem today belong to another geological era. The ESM would only intervene in favor of states whose debt is judged sustainable, imposing heavy conditionalities, which can also lead to a real preventive restructuring of the debt which, if not judged sustainable by the ESM, becomes in fact a precondition for access to the loan. Have you ever seen a doctor condition the administration of a medicine to the absence of symptoms of the disease? The ESM would work like this, with the aggravating circumstance that its mere presence would cause the disease itself. In fact, the debt sustainability analysis, carried out in a preventive and systematic way, means accepting that precise criteria are transmitted to the markets on the basis of which to verify the probability that a State is among the good or the bad, risking to trigger a downward speculation. on our government bonds . "A support tool that seems designed to penalize more precisely those who might need that support the most", as the president of CER (Centro Europa Ricerche) defined it Vladimiro Giacché in a parliamentary hearing at the end of 2019 and, after a year, it is difficult to find a better synthesis.
Exactly in the same days, the governor of Bankitalia Ignazio Visco perfectly identified the risk of debt restructuring by specifying that "this reform is part of the initiatives aimed at reducing uncertainty about the methods and timing of a possible restructuring of a public debt [ …] The limited and uncertain benefits of a debt restructuring mechanism must be assessed against the enormous risk that would be run by introducing it: the simple announcement of such a measure could trigger a perverse spiral of expectations of insolvency, which can be self-fulfilling ".
So it must be explained that the reform of the "Save States" marks a turning point of exceptional importance for the future of our country's economy, because there is the enormous risk of institutionalizing the presence of the Troika in Palazzo Chigi.
These risks are duly described in an interesting study on the subject published last May and co-signed by the director of legal affairs of Mes Jasper Aerts , therefore a source above all suspicion.
The ESM is a tool to make a restructuring of the public debt manageable in an orderly manner. Purely and simply. And it does harm by just existing because it facilitates a self-fulfilling prophecy, well summed up by Murphy's law: if something can go wrong, it will. And even at the worst moment, we add.
The single limb collective action (Cac) clauses for all outstanding securities (rather than a separate double vote for each series and for all securities, dual limb), prevent a creditor holding more than 33% of the securities of a single series, you block the restructuring of all the debt. And it is therefore an extraordinary incentive to provoke the flight of investors fearful of restructuring. This flight, in turn, leads the issuing State to lose access to the markets with the consequent entry into the scene of the ESM loans conditional on a macro adjustment program (at best) or a debt restructuring. In fact, the ESM, as a creditor, cannot lend to a State at risk of default and the State would be forced, in order to access the loan, to ask creditors for a debt cut that makes it sustainable. Or a mega asset on the financial and real assets of Italians. A deadly causal sequence, which has its trigger in the evaluation of the sustainability of the debt carried out ex ante by the ESM . This exercise ended positively for our country last May, only because it contains the objective of reducing the debt / GDP ratio to pre-Covid level by 2031. 25 points less in 10 years: 2.5% per year . The classic bloodletting that threatens to kill the patient. This causal sequence would become even more probable and rapid if a new government decides not to respect this path of return, making various budgetary policy choices. At that point, the Troika men may have already packed their trolleys.
Those clauses offer, without even much effort, a gun to get the Member State to pull the trigger. But it gets worse: investors, being aware of this probable scenario, will try to disinvest quickly, creating financial instability and thus contributing to the fulfillment of the feared event. Even for the Mes lawyer this is a possible scenario ("it is not a black or white situation, only time will tell"), but not for Gualtieri who offers us yet another obviousness constituted by the absence of automatic preventive debt restructuring . And God forbid! Gualtieri speaks of discretion granted to States in decisions which is however irrelevant since the Mes will impose its presence without the need to call it, due to the causal mechanism described above. It is the main tool to impose the discipline of the markets ( old point of the German Wolfgang Schauble exposed in his non-paper at the end of 2017 ), which force a Member State, with ruthless effectiveness, to vote unanimously even the decision to pull the trigger on itself (our vote in favor of the Fiscal Compact and bail-in in the recent past should teach something). In this regard, what was written by the prestigious columnist, already at the Financial Times for 17 years, Wolfgang Munchau , is illuminating .
But there are also doubts about the merits on the aspect of the reform most exalted by Gualtieri. The minister praised the virtues of the new backstop loan that the ESM should be able to provide in favor of the SRF starting from 2024. According to him, the advance to 2022 of this credit line of 68 billion with a renewable 3-year maturity , is a subject to be proud of as it derives from a positive risk assessment of our banks, which have considerably reduced bad loans in recent years. What the minister did not tell us is that this Fund amounted to only 33 billion in July 2019 and should reach around 1% of eurozone deposits by the end of the transitional period (2023). It has also been careful to add that the intervention of the SRF in the event of bank failure presupposes the bail-in of up to 8% of the liabilities of the bank involved, which, as we have seen in Italy, only a few years ago, is not just a factor of stability and peace of mind for savers.
So what will happen from here until January 27, 2021, when the plenipotentiary ministers of the 19 Eurozone countries will sign the act of adoption of the reform of the ESM Treaty, starting the ratification process by the respective national Parliaments, which could last about a year? The wait will be full of twists like waiting for the 3:10 train in the western movie That Train to Yuma?
Of course, the political agreement reached on Monday at the Eurogroup is a decisive step, but not definitive, for the conclusion of the entire affair. There are at least two other significant stages: next 9 December, President Giuseppe Conte will go to the Chambers for the usual communications that precede each European Council and Euro Summit and, in that meeting, there will be a vote on one or more address resolutions. (usually a majority and a minority). On 11 December Conte will participate in the Euro Summit in which the political will expressed by the Eurogroup will be endorsed by the heads of government.
It is likely that next Wednesday in the classroom all the tensions that emerged within the M5S will explode after the hearing of Minister Roberto Gualtieri and his subsequent endorsement of the ESM reform. And today we have already had a substantial appetizer with a letter of opposition to the reform from 52 deputies and 17 senators of the Movement. On Tuesday there had already been a compacting of the opposition.
Waiting for the train to Yuma won't be boring.
AND NOW YOU CAN NO LONGER SAY THAT YOU DON'T KNOW
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The article THE HUGE CRITICALITIES OF THE MONTH SECOND LITURRI ON STARTMAG and our premise comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/le-enormi-criticita-del-mes-secondo-liturri-su-startmag-e-nostra-premessa/ on Thu, 03 Dec 2020 08:10:54 +0000.