Vincenzo Visco, formerly Finance minister in the 1990s, has recently
contributed to the debate on the plausible consequences of an Italian unilateral exit from the eurozone, a debate stimulated by Economia e politica, starting from a post by Realfonzo and Viscione.
Visco seems to be very well informed on the details of international agreements signed by our government (certainly better informed than I am!). He claims that
when the ESM was established, members of the Eurogroup agreed that a redenomination in new currencies of existing sovereign liabilities, with a maturity longer than 12 months, could be vetoed by a minority of 25% of creditors (my translation)
It is not at all easy to verify this statement. The Treaty establishing the ESM should be available here
as reported in the relevant page of the European Commission website, but the European Council has moved the document somewhere else, and searching for it in their search engine has been frustrating.
From the few information I could collect in one morning I understand that the Treaty establishing the ESM (European Stability Mechanism), modified in 2012, required governments to introduce Collective Action Clauses (CACs) on any sovereign bonds issued from 2013, with a maturity above 12 months.
Searching on the internet for details I have found this document
These CACs protect creditors in case of controveries, etc.
I could not verify, in about half a day of work (and limited knowledge of international laws!) whether prof. Visco is right. Let us assume he is right.
This means that, with no publicity whatsoever, our governments are increasing the rights and protections of creditors – especially foreign creditors – at the expenses of anybody else.
My friends who know better about international laws suggest that these Treaties can be ignored, when a conflict arise with national inertests. I wonder. In any case, it will make negotiations more complicated, in case an euro exit materializes for Italy.
Visco also adds that the Bank of Italy will purchase 140 bn € worth of Italian bonds under the QE programme, which will be on foreign law “by definition”.
This is certainly incorrect, since the Bank of Italy will purchase such bonds on the secondary market, and they will have been issued under Italian legislation (i.e. they can be converted to a new currency in case of euro exit).
On the other hand, the QE program has some clauses on risk sharing, in case of a government defaulting on it debt. In case such rules extend to redenomination of existing government liabilities, the Bank of Italy may be called to take the largest share of the burden of eventual capital losses.
The interpretation here, which suggests that such bonds will be “de facto” under foreign law, seems more plausible.
If this is correct, given that QE will inject liquidity in the Italian banking system and that such liquidity will mainly be used to purchase financial assets elsewhere (rather than for financing Italian SMEs), if this implies transforming public debt under Italian law in “de facto” foreign debt, is it worth it?