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THE TARGET2 PAYMENT SYSTEM, AN INESCAPABLE TRAP FOR BANKS IN THE EUROZONE?Italian parliament wants to introduce a currency that is parallel to the Euro

Călin Rechea ( translated by Cosmin Ghidoveanu)
Ziarul BURSA #English Section /

Italian parliament wants to introduce a currency that is parallel to the Euro

"Parallel currencies" pave the way for Italy's exit from the Eurozone, says Carlo Cottarelli, of the Catholic University of Milan 

Călin Rechea ( translated by Cosmin Ghidoveanu)

The Bundesbank warned that it might suffer great losses if a major country were to leave the Eurozone and stopped payments for debts based on the TARGET2 system.

This is how Ambrose Evans-Pritchard starts its recent article in The Telegraph, in which he presents the implications of the recent vote in the European parliament.

At the end of last month, the legislative in the Peninsula expressed its unanimous in favor of a motion which allows the introduction in the economy of a "parallel currency".

The new currency would in fact have the characteristics of a government bond with a very small value, hence the name "minibot". The introduction of the new financial instrument would facilitate the payment of the government suppliers and would also be usable for the payment of tax liabilities. The security would have no bond and would not pay any interest, but the interest would exist implicitly, as the conversion of the securities to the Euro would be done at a discount compared to the face value.

Carlo Cottarelli, of the Catholic University of Milan, told daily Il Sole 24 Ore that the unanimous vote for the motion can only mean that many deputies have not understood its true implications.

The most important of course being the paving of the way for Italy's exit from the Eurozone.

Perhaps the "synchronization" between the moment of the vote and the beginning of the excessive indebtedness by the European authorities does not represent a coincidence.

Alberto Bagnai, the president of the Financial Commission of the Senate and member of the La Lega party, led by deputy PM Matteo Salvini, said that "all the talks about Italexit are just much ado about nothing", according to a piece of news by Bloomberg, where it is stated that "economics professor Bagnai wrote two books arguing for the need to dissolve the monetary union".

Meanwhile, parliament members of the Democratic party have asked for the emergency change of the text of the motion, to exclude the minibot titles, and Il Sole 24 Ore, the biggest financial newspaper in Italy expresses its hope that the minibots will not be introduced too soon, as the country's sovereign bonds have a higher default risk than those of Greece.

All of these may prove only of secondary importance, because the authorities in Brussels insist on "punishing" Italy, becauss the "populist" authorities in Rome aren't doing enough to pay off the debts accrued following the irresponsible policies of the "pro-European" governments of Rome of the last few decades.

The European Commission has just announced that Italy is violating the fiscal rules of the EU, amid the increase in its public debt, and thus the launch of a "disciplinary procedure" is justified, according to Reuters.

Data and forecasts from the European Commission show that Italy's public debt has increased to 132.2% of the GDP in 2018, from 131.4% in the previous year, and will reach 135.2% in 2020.

The return to the attention of the press of the minibot instruments seem to have greater significance than about a year ago, when the implications of the parallel currency have been analyzed amid their inclusion in the government agreement between La Lega and 5 Stars.

Why? Because the particularly negative implications of any measure which can lead to Italy's exit from the Eurozone are have been included in a recent analysis of the Bundesbank, the German central bank.

After warning about "heavy losses", the Bundesbank document further points out, that "any attempt to prepare for such an event could lead to the beginning of a speculative attack".

The best of all possible worlds, isn't it? The feeling of nothingness must be overwhelming for the biggest lender in the Eurozone, especially since both the Bundesbank and the ECB have denied, up until recently, that there is a risk of default for the exposures of the TARGET2 payment system.

The last data from the ECB shows that Germany's positive balance as part of the TARGET2 system fell to 919.7 billion Euros in April 2019, from la 941.3 billion on the previous month, whereas Italy's negative balance increased by almost 7 billion Euros, to 481.5 billion.

In other words, Italy owes its creditors approximately 481 billion Euros, while Germany has debts of approximately 919 billion to "collect".

"No one asked the German taxpayer if they wanted to provide loans of 920 billion Euros through the TARGET2 system, there was no vote in the Bundestag", Evans-Pritchard writes.

Even though "the Bundesbank still claims that the disintegration of the Eurozone is hypothetical, the institution admits that the TARGET2 payment system involves a series of unavoidable costs", the British journalist further writes.

Ambrose Evans-Pritchard further points out that the analysis of the Bundesbank gives "the impression that the authorities don't have a clear strategy for such a crisis".

The British journalist then quotes professor Philip Turner, former official with the BIS (Bank for International Settlements), according to whom "the balances of the TARGET2 system represent loans that have not been approved by any government and which hide the fundamental imbalances of the Eurozone system".

On the other hand, no framework for the exit from the Eurozone can be negotiated, because "speculators would encircle the prey like sharks", as stated by an Italian official of the market watchdog Consob.

However, the harshest verdict comes from German professor Hans- Werner Sinn, a veteran among the critics of the TARGET2 system, which has claimed for many years that "the TARGET2 imbalances do not autocorrect, despite the statements by the Bundesbank", and "the existing credit will never be recouped".

"The TARGET2 regime represents a systematic lie presented to the German people", professor Sinn further states.

This is the context in which Mario Draghi, the president of the ECB, whose "title" is now "lame duck", has tried to present the new options to the press after the last monetary policy session, as if such a thing even exists.

Many years have passed since the trap has been sprung on the European Central Bank, a trap "carefully " set up by the very monetary authority of the Eurozone, which has done everything to ensure the illusion of the solvency of the governments in the Eurozone.

Now all that's needed is a "hunter" that is willing to end the suffering of the trapped prey.

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