And The FT reports today that this parallel currency proposal is being revived:
Debate is growing in Italy about the suggestion that a new domestic currency could be introduced by the government to pay its debts - and the possibility that Rome’s Eurosceptic coalition might use it to facilitate the nation’s departure from the euro.
Prominent members of deputy prime minister Matteo Salvini’s ruling League party have floated the proposal - which was endorsed by a vote in the Italian parliament last week.
The concerns over Italy have hit mainstream media in the EU, but not the US. For example, please consider German Bundesbank Comes Clean on Euro Default Risks After Italy's 'Parallel Currency' Decree
The German Bundesbank has warned that it could face heavy losses if a major country leaves the euro and defaults on debts to the European Central Bank system, but warned that any attempt to prepare for such a crisis could backfire by triggering a speculative attack.
The analysis is highly sensitive coming just days after the insurgent Lega-Five Star government in Italy passed a decree in the Italian parliament authorizing the creation of a parallel payments system known as ‘minibots’, a scheme decried by critics as a threat to the integrity of the euro and potentially a ‘lira-in-waiting’.
While the Bundesbank text sticks to the standard line that a euro break-up is hypothetical it nevertheless admits - after years of obfuscation - that the ECB’s internal Target2 settlement system entails inescapable costs for Germany and other EMU member states should it ever happen. It also gives the impression that the monetary authorities have no clear strategy for handling such a crisis.
Professor Philip Turner, a former monetary official at the Bank for International Settlements, said the politics of Target2 are poisonous. “This is lending on a huge scale that no government has approved. It is covering fundamental imbalances at the heart of the eurozone system, and it can’t go on indefinitely,” he said.
The International Monetary Fund says it would be hard to prevent a sovereign debt crisis in Italy engulfing Spain and Portugal. The ECB could therefore face a Target2 crisis approaching €1 trillion if Italy’s rebel government sets off a chain reaction with its ‘minibot’ notes - which it claims are needed to cover €52bn of state arrears to Italian contractors and households.
The Bundesbank’s text states that if a country leaves EMU and its central bank defaults on Target2 liabilities, the ECB will have to eat through a series of buffers: first its own capital - dramatic enough - and then by drawing in money from the remaining central banks on a ‘capital key’ basis.
There is not a single thing shocking in the preceding analysis other than the discussion is finally taking place at top levels.
