Conte also gave his maiden speech in parliament. Rhetoric about Europe was toned down, tax cuts pushed out to subsequent years and the criteria for receiving universal basic income tightened. However, the market remains nervous with Italian yields hovering near their highs. The nervousness is compounded by the backdrop of tightening global liquidity which we have been highlighting since Q4 last year.
Attack of the mini-bots
We have noticed increasing market commentary about mini-BOTs. These are small (EU1 to EU500) euro denominated zero interest bearer bills with no maturity.
They will be printed by the Italian Treasury and used to pay civil servants and firms which have outstanding credits with the government. They can be used to pay future taxes or pay for goods and services provided by state-controlled companies (e.g. petrol and train tickets).
The private sector will not be obliged to accept mini-BOTs as payment and they would therefore (theoretically) not violate the European Treaty as they are not legal tender. They will be tradeable and, as they are backed by future government tax receipts, they should (theoretically) preserve their value. In practice they would obviously trade at a discount to face value.
Supporters claim they will inject much needed liquidity and stimulate domestic demand. They also argue that they will not count as new debt as they are a securitisation of debt that already exists.
Argentina issued small-bill IOUs (“LECOPs”) to pay civil servants in the early 2000s amid surging inflation. California temporarily used IOUs in 2009 for personal income tax refunds when it ran short of cash. Greek leaders considered issuing electronic IOUs in 2015 when they were negotiating with creditors to keep the country in the euro.
The obvious concern is that the issuance of mini-BOTS would be a precursor to an Italexit. We do not think this is the case if they are limited to a cap (e.g. as a percentage of GDP). The markets however could over-react and we remain cautious.
We have been wrong on our call for the outperformance of European bank capital versus European high yield in 2018. They have both suffered in the current risk off environment. We had thought that, as banks have deleveraged over the last decade, they would be less sensitive to market volatility. However, Italy has reignited fears of the sovereign to bank feedback loop and this has dragged down the entire sector. Excluding Italian banks, we think this is wrong and an over-reaction and see good value in the sector.
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