Marcello Minenna, a division head at the Italian securities regulator, emailed his plan to “Cure the Eurozone”.
Marcello Minenna, the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator, pinged me recently with his plan to save the Eurozone.
The plan requires debt guarantees with a catch: The catch is the guarantees have a price: The riskiest countries have to pony up the most for debt insurance.
His thoughts are in a downloadable PDF on Curing the Eurozone. A slightly different version can also be found on FT Alphaville: Getting to Eurobonds by reforming the ESM.
Minenna notes the “European Stability Mechanism (ESM) has subscribed capital of €704bn but only 11.4 per cent of that has been paid-in; the remainder is callable shares. Thus, the Mechanism runs a large gap between subscribed capital and paid-in capital. Should the Board of Governors call in authorized unpaid capital (€625bn), ESM members would have to quickly meet the call with additional contributions.”
Minenna proposes a risk-sharing agreement whereby riskier countries pay insurance premiums to the ESM in the form of capital injections.
Cost Benefit Italian Case
For Italy, the total cost of the guarantee would be €56bn to be spread over a 10-year horizon, but starting from the third year this cost would be more than offset by the savings in interest expenditure.
Over ten years, Italy would pay an estimated €56bn to the ESM in the form of insurance premiums. The associated public investments would increase Italy’s GDP by a cumulative €150bn.
At the end of the 10th year all debt will be fully risk-shared.
“The extra payments to the ESM would be a challenge, but they would be a big improvement to the current situation, where, because of the fiscal compact, the danger of rate hikes and the over-prudential discipline on non-performing loans, finance has stopped flowing to the real economy and the public budget has lost €100bn of tax revenues from banks and businesses,” claims Minenna.
