Quick thoughts on mini-BOTs

So everyone in London has got excited about mini-BOTs – Italy’s prospective parallel currency after Munchau on Monday and then Dizard today have written about them in the FT.

A quick recap:

• Italy has been a growth laggard (average GDP growth since 2004 has been 0%, although there has been steady slow growth since 2014), and has high levels of debt (c.130% of GDP).
• March 4 saw the Italians go to the polls. Conventional wisdom saw the outcome as a likely stalemate unless the right-wing populist Lega Nord (the League) and the left-wing populist Five-Star Party could come together in coalition. As someone on Twitter put it, this would be like imagining the audience of BBC Question Time putting aside their differences and forming a government.
• Five Star wants things like a Universal Income; The League wants things like flat taxes. In each party’s mind their own favoured policies probably pay for themselves with an exploding renaissance of growth. In everyone else’s minds (including each others) these policies probably lead to an exploding renaissance of debt issuance.

So there is this idea kicking around that they fund their wish-lists not by issuing currency (which they can’t do because the ECB is the monetary sovereign), and not by issuing bonds (which I guess they reckon the markets won’t like and the Commission will get prissy about as it will break all manner of rules). Instead they want to issue mini-BOTs – small-bill government debt that looks and feels very like Euro notes. And look and feel very much like money.

But would mini-BOTs be money?

They don’t look like they would be legal tender. But this might not be a big deal. Legal tender is a pretty narrow legal definition. My basic understanding is that it means something that law courts understand as being unlawful to refuse in payment of a debt. And in the Euro area, the Commission is pretty blunt about how only the euro is legal tender here. They also (helpfully) explain that although non-official (euro) currencies “have no legal tender status, parties can agree to use them as private money without prejudice to the official currency”.

In the UK we use lots of things as money that have no status as legal tender. Scottish and Northern Irish banknotes are not actually legal tender. Furthermore, 1p and 2p coins are legal tender for sums only below 20p, 50p coins are legal tender for sums not exceeding £10.

This isn’t the first time we have seen this sort of thing. Even in Italy there is some precedent for creatively using local currencies that are backed by state obligations as a currency, albeit at a local level. This nice story via Lorcan Roche Kelly tells of a local community that introduced a local currency that was backed by state debts. In fact, it looks in many ways to be a municipal version of mini-BOTS which provided credit to the local government and liquidity to the local economy.

But governments don’t usually do this sort of thing unless they are in trouble. So the signalling is pretty terrible.

• Argentina issued one-year small-bill bonds (nicknamed Patacones) to its civil servants in a short-lived effort to keep its currency pegged to the US dollar. These were widely accepted (at a discount to US dollars) and McDonalds quickly launched their Patacombo meal. Patacones could be used to settle tax obligations with the state, just like mini-BOTs.
• California issued state IOUs under Schwartzenegger in 2009 in a similar effort to cover its gaping budget holes, just as it had in 1992 and 1993. These IOUs were paid to vendors doing business with the state as federal law prohibit IOUs to state employees. I don’t know whether there is any European Directive that prohibits Eurozone countries from doing the same but somehow I doubt it. California didn’t turn out too bad? Well, banks only accepted these IOUs for five days before closing down this option according to wiki. The California Budget crisis rolled on until both spending was cut and taxes (and university tuition costs) were raised, as well as the rebound in the (national) economy that boosted tax takes.

Despite this, mini-BOTs might actually qualify as money by the rules of some monetary bean-counters (depending on their term). Whether they were used as a unit of account would determine where they sat in my Venn. Mini-BOTs would look and feel like money, but if they have a term to them (a date at which they can be redeemed for actual euros) I reckon that they just have just a lot of euro-moneyness.

In fact, they would likely turn out to be a strong reminder that the Italian state is not the monetary sovereign, and the subject of a big fight in Brussels as the Commission (rightfully IMHO) called them out as debt which would need to be included in Eurozone-specific debt numbers. And it is the prospect of this incipient fight that is roiling markets.