Will Draghi really put the Italian debt in the ESM?
Public debt in the ESM: facts, analyzes, scenarios and unknowns. Giuseppe Liturri's analysis
Punctual as the tax collector, on Thursday a " senior EU official ", in view of the Eurogroup meeting on Monday, "warned" that the ratification of the ESM treaty is "now complete in almost all states. We have confidence in Italy and in other countries on the respect of their commitments ". He then added that "the ESM is important for the economic resilience of the EU" and on the Italian case, he specified: "there is no reason to be unhappy, it will be a friendly reminder".
Until Friday evening, Italy, France, Germany and Portugal were the last 4 states not to have ratified the Treaty governing the ESM, in the reformed version and signed by their respective Governments at the end of January 2021. Curious coincidence, this is the simultaneous delay of the first three economies of the eurozone. Precisely those which, with their respective bilateral agreements, allow Emanuel Macron, Mario Draghi and Olaf Scholz to quickly coordinate the hottest dossiers of European governance.
And the urgency of ratification, and the consequent full legal effectiveness, of the Mes is not so much linked – as for months they want us to believe – to the early entry into force of the loan in favor of the single resolution fund for banking crises. It is not clear where the rush is, since this fund, fueled by the contributions of the banks, has already begun to dispose of about 55 billion, to which a sum of the same amount could possibly be added by way of a "parachute" by the Mes. And there don't seem to be any major banking crises on the horizon.
The reason for the rush is another. The reformed ESM also brings with it clear, stringent and clear-cut requirements for access to precautionary credit lines, made available to Member States that have lost, or are about to lose, access to markets . On the basis of precise quantitative parameters, the requesting Member State will be subjected to less onerous conditions – defined with a simple letter of intent – or more onerous – contained in a memorandum of understanding generally containing a macroeconomic adjustment program. The pillar of parameters is precisely compliance with the Stability and Growth Pact, whose reform will be discussed throughout 2022, and it is easy to imagine which line Italy could have access to.
The reformed Mes must be ready as soon as possible because it is functional to the project that has been smoldering for at least a year and a half. In fact, the first paper dates back to October 2020 – written by economist Stefano Micossi, general manager of Assonime, with top positions at LUISS and the prestigious Brussels think tank CEPS – widely known only in the small circles of economists in the field, of which we reveal the salient features below. Another paper was then published in March 2021 and the last one is from last November , in which the threads of the debate are drawn and the finished product is proposed. A project ready to be built. Only the contractor is missing: the Mes.
The letter from Draghi and Macron of 23 December to the Financial Times was therefore not a bolt from the blue, but the affixing of the final seal to this intense academic work and the study of Professor Francesco Giavazzi and others, which is reference in that letter is not at all original but – for the part relating to the settlement of the previous debt – draws heavily on the studies cited here.
The problem under consideration is the fate of the large public debt accumulated in the assets of the ECB as a result of the pandemic crisis. For Italy alone, we are talking about approximately 350 billion expected by the end of March, which rise to 720 billion, calculating approximately 30% of outstanding public securities since the start of purchases in 2015.
The project starts from the premise that the prospects for rising inflation will gradually reduce the need for an expansionary monetary policy. In this scenario, the ECB would no longer have any justification for holding those bonds and would have to progressively sell them, otherwise it would violate the Treaties. This operation would cause considerable instability on the financial markets, especially in relation to the securities of Member States with a high debt ratio (see letter “I” as Italy). At this point the Mes would come into play which, in annual shares, would buy securities equal to 20/25% of the eurozone's GDP. Something oscillating between 2.5 and 3.3 trillion (around 500 billion for Italy), which would be held and renewed at maturity in perpetuity.
For conditionalities, full reference should be made to the infamous Annex III of the Treaty (as reformed), previously illustrated.
Fortunately, Micossi does not escape the fact that – with the movement of public securities from the ECB to the ESM – the flow of dividends that Bank of Italy to the Treasury every year would cease thanks to the interest collected on the securities in the portfolio but, incredibly, robs the problem as a marginal fact . Data in hand, we believe that out of about 55/60 billion of annual interest expenditure, 8/9 billion is about 15%, not exactly petty.
All possible legal obstacles are promptly addressed and overcome by Micossi, according to whom the MES would act pursuant to article 18 of the Treaty, which would allow the purchases of Italian securities on the secondary market in order to "safeguard the financial stability of the 'eurozone' and the study supports the full compatibility of this operation with a whole series of articles of the Treaties (TFEU specifically).
What could prevent the improvement of this project?
As mentioned at the beginning, the fact that France, Italy and Germany have not ratified does not appear at all by chance. In 2012, on the occasion of the ratification of the original Treaty, a sentence of the German Constitutional Court which has now been ratified by all the other Eurozone states, placed an important interpretative reservation on two articles of the ESM Treaty and, in order not to restart the ratification process, the incredible result was reached of having a treaty that has the same meaning for 18 countries and a different meaning for Germany . This time too we are in the same situation, since an appeal to the Karlsruhe Court by the German liberals has been pending since last June.
It is therefore reasonable to assume that, in this round, France, but also Italy, do not want to find themselves in the same embarrassing situation and are deliberately slowing down the ratification process. For Italy, there could be the additional problem of a parliamentary majority not exactly agreeing on ratification.
Now the ball is in the hands of President Draghi. Will he really want to put the country in the hands of a "bad bank"? The first answers will arrive on Monday.
(Integrated and expanded version of an article published by the newspaper La Verità)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/draghi-davvero-mettera-il-debito-italiano-nel-mes/ on Sun, 16 Jan 2022 07:33:41 +0000.