Let’s be clear: I think that the report by Mediobanca on costs and benefits of “Italexit” (the exit of Italy from the Eurozone) is a terrible mess. After being covered by the Italian press, this report has also been discussed by Ambrose Evans-Pritchard on the Telegraph: he pointed out how there would be a net gain of 8 billion euros for Italy, if it decided to exit the Eurozone right now, but that this gain would turn into a net loss as time goes by.
According to the Mediobanca report, the net benefit does decrease because the share of Italian bonds under the so called CACs (Collective Action Clauses) is steadily rising. Bonds under CACs allow for a majority of creditors to decide for all creditors how to restructure the credit, if there is a “credit event”, e.g. a country exiting from the Eurozone, and possibly to redenominate that debt in another currency. According to the authors of the report, in case of Italexit the Italian government would accept not to redenominate the bonds under CACs in “new liras”, in order to avoid losing market access for subsequent offerings.
This cost connected to those non-redenominated bonds must be compared with the benefit of bonds that are not under CACs, so that they can be easily redenominated in new liras without litigation risks (under the so called “lex monetae”). The Mediobanca report quantifies this benefit to around 200 billion euros. Which type of gain? This is not very clear: maybe the underlying reason is that those bonds could be directly purchased by the Bank of Italy, in fact ordered to do so by the Italian Treasury [see below].
Let me get straight to the point: this report is a piece of Dadaistic art. Some parts sound accurate, i.e. those parts on which the authors appear to be more knowledgeable (i.e., the legal aspects of sovereign bonds). Some other parts are a terrible mess, especially those dealing with the basic macroeconomic assumptions. Finally some other parts are worryingly silent on issues that cannot be but crucial in case of an Italexit event.
For the messy parts, here are two notable examples:
- To account for the harm that the euro has supposedly done to the Italian economy, the authors of the report take for granted that the fixing of the nominal exchange rate had negative effects on the dynamics of the productivity of labour, which –together with the huge public debt- is the worst aspect of the Italian economy. I find it amazing: a simple correlation in the data is taken as a causal effect, with no sound econometric analysis of the set of factors that have an impact on the flat profile of Italian productivity. I want to be kind here: this stuff would not be acceptable in a mediocre undergraduate dissertation.
- The report assumes that –in case of an Italexit event- the Bank of Italy and the Italian Treasury (MEF) would “marry again”, i.e. they would end their 1981 “divorce”. This divorce was simply the end of the duty for the Bank of Italy to purchase the newly issued Treasury bonds that the market would not buy. And here the duty strikes back: by the way, the language adopted in the report is exquisitely obscure, but one might suspect that the supposed gains on bonds that are redenominated in new liras depend on the fact that the Bank of Italy stands ready to buy them directly, with inflationary effects that are not discussed at all.
Then we have to deal with the outrageous omissions. More precisely:
- On page 22 of the report, the authors passingly mention that 672 billion euros of Italian private debt are under international laws, i.e. about 70% of the total amount, and that 549 billion euros are owed by financial institutions. The report explicitly states that it would not deal with the effects of eurexit on those private debts. Still, the authors are graciously alerting that the private sector might face significant losses, in case those debts are not redenominated. Mmm let me think about it: oh yes, banks are part of the financial sector. See next point…
- Nothing in the report is said about the financial stability of banks if and when Italy exits the Eurozone. The authors appear to be assuming that a coordinated eurexit procedure could save banks from bank runs, against good sense and experience in similar cases (does anybody remember Greece?). This adds up to the issue of private debts under international law [see above].
I must conclude with two bitter thoughts.
- I am really amazed that an old and serious investment bank of the likes of Mediobanca decides to issue such a Dadaistic report, full of omissions and obscure paragraphs: are its clients really willing to pay to read this mess?
- There is a good bunch of business journalists who failed badly by covering this report the way they did. In fact, there are so many people that blame economists for all sorts of evil, starting from “the austerity policies that starve us” etc. But the matter here is very simple: business journalists should stop pretending to be economists: right now they show a structural inability to understand the strengths and weaknesses of any economic analysis, as witnessed by the case of this Mediobanca report. The credibility of journalists is a capital good that accumulates more slowly than one could hope for, and that shrinks more rapidly than one could fear.
PS for the very curious readers: here you can find the Mediobanca report.
PS2: I thank Carlo Piana for his great help!