“Debt annihilation”: Claudio Borghi’s solution for Italy and the eurozone

Italian journalist Silvia Marchetti speaks to the controversial economic spokesman for Italy’s Lega party and former banker on debt cancellation, why the eurozone needs a “super” ECB and a “flexible” euro club

Claudio Borghi, Italy’s ruling Lega party economic spokesman, has always been a hard-core, proud “No Euro” supporter and has never denied it.

“We all know what I think: I would prefer a euro exit,” he admits. “But that’s not in our government agenda and never has been. Italy wanting to leave the euro club has so far been simply fake news fed to markets to boost volatility and spike the spread in yields between Italian and German bonds. Mere speculation, that’s all.”

“I’ve been against the single currency ever since the very beginning, it never has been a secret. But that’s my personal position. I’ve said and written it dozens of times in my books and essays, that the euro, unless it reforms, is fated to die.”

Dr. No Euro

A former banker then economics professor, Borghi rose to prominence in the ‘Northern League’ or ‘Lega’ party in 2014. This year the party took power in Italy in a marginal alliance with the 5 Star Movement. Both parties have been criticised heavily for their populist stance, not least Lega for their view on immigration and their politicisation of the Mediterranean migrant crisis which the UN estimates has cost the lives of 15,544 people since 2014.

Dubbed ‘Mr. No Euro’, each time he speaks, Borghi has the power to shake financial markets and spread fears over the risk that Rome’s new populist government, could push Italy (a founding member of the European Union) to actually abandon the euro club. As head of Italy’s Lower House budget committee, his words are, at times, seen as more crucial than those of the economy minister.

But he’s also quick to soothe concerns and clarify that his government has subtler, though ambiguous and controversial reformatory plans. “A euro exit is off the table,” he concedes, however, he argues that the single currency is not irreversible nor sacrosanct, and it is badly in need of a makeover “if it intends to survive”.

The European Central Bank also needs a restyle, he says, because its governance model is unfit to tackle the financial challenges of tomorrow. “We want to reform the eurozone, revisit all treaties but above all give the ECB a modernized statute that can enable it to have more powers in protecting member states against external shocks.” Those shocks are currently manifesting themselves as “the spread in yields frenzy,” a sort of merciless enemy that loves to attack debt-exposed countries such as Italy.

Borghi in the Italian parliament

Grazie Italia! 

For Borghi, it’s an example of why the ECB should do more to help debt-ridden states meet their fiscal goals. His novel proposal, which he describes as a “very simple matter”, is that the ECB cancels all government securities purchased within the assets purchase program (APP): an agent of quantitative easing set to terminate in December.

“Just cancel all APP-linked debt. If the ECB really wants to help us reduce our debt, instead of constantly finger-wagging, it can go ahead and scrap all the Italy state bonds that it purchased with quantitative easing. Immediately, our debt would decrease by roughly a fourth without causing problems for anyone.”

Wouldn’t hair stand on end in Berlin and Brussels if such a proposal actually turned into a subject of debate at EU level? Not at all, says Borghi.

Asked whether other member states, primarily Germany, would gladly share the burden of paying for Italy’s debt, Borghi says the ECB’s generous “debt annihilation” would not be exclusive to Italy but extended to all member countries.

The ECB headquarters in Frankfurt

Actually, all Europe would benefit from it, thus making everyone happy: Borghi is convinced that even Berlin would rejoice at the thought of seeing its debt automatically fall. He is unconcerned about questions of feasibility, financial havoc and the potential bankruptcy of the ECB itself.

The yield shield

But there’s more to the Borghi philosophy than just debt cancellation. Not only should the ECB turn into a philanthropic entity, it should also take on the role of Europe’s chief firefighter by stepping-in to extinguish market flames in worst case scenarios, such as when the discrepancy in bond-yields across the eurozone that he has identified, begins to skyrocket.

“Ok, for now there’s the APP acting as a parachute against financial shocks. But its end is near, then what?” he asks in a worried tone. “We need to look beyond, be realistic. The European Central Bank should [provide a] guarantee for sovereign debts of all member states, particularly those facing unfounded default risks tied to political issues, in order to shield eurozone stability from hazardous financial speculations. No EU country, in an integrated eurozone, should have its sovereign debt turn into victim of the spread [between bond rates]. The ECB can’t allow this.”

Superbank!

Europe thus needs a “super” central bank along the lines of the Federal Reserve and the Bank of England, lenders of last resort to their own countries. Their mandate to guarantee financial stability and stave-off external sovereign debt attacks, should be mirrored in the eurozone stresses Borghi.

One way to empower the ECB with an anti-spread mandate could be placing a cap on a “tolerable” spread level which, once breached, would trigger an emergency intervention by Frankfurt.

The yield for Italian 10-year bonds has risen in 2018. Source: Bloomberg

While the yield being paid on German 10 year bonds has fallen. Source: Bloomberg

“An option could be, say, to set a 150-200 base points cap on the spread. If, at any moment, a member oversteps this threshold due to a financial speculative attack, the ECB would come to the rescue by purchasing sovereign securities of that state and so placate market turmoil.”

The eurozone is crippled by a dysfunction in need of a cure, he says. It is the only monetary area in the world dominated by the spread “tyranny”, which Borghi believes must be destroyed. Plus, the gap in spreads between virtuous and debt-ridden countries creates distortions and asymmetries within the eurozone.

So…Ciao ciao spread…

Though his ideas may seem far-fetched, the need to review the ECB’s monetary tools haunts most policy-makers across the continent. Borghi expresses concern that once the APP ends, the ECB might face an ammunition shortage to stave off future crises. For instance, the outright monetary transactions (OMT) – whereby the ECB buys government-issued securities provided the bond-issuing state agrees to implement tight fiscal and economic measures – is unpalatable: “The OMT, announced a few years ago, may soothe market fears and avert temporary disruptive risks at pan-European level, but on a national level it can be very harmful and tough for the country subject to it.” In return for being granted the OMT, the member state must follow a tight budgetary program which Borghi sees as limiting its sovereignty and therefore unacceptable. “No country should ever be forced to bend the knee, nor go hat in hand to Frankfurt or Brussels asking for financial help.”

Free money tomorrow???

Like the eurozone itself, Borghi’s solutions seem full of complexities – with, it seems, some additional contradictions: States should not be forced to seek financial help but the ECB should be obliged to assist them by buying and cancelling their debt. If the difference in interest being paid on respective bonds is more than 2% (Italy is currently paying at 3.2%, while German bonds are around 0%) then the ECB should also step in. Borghi does not address the scenarios where a state-issued bond posts a negative yield or a defaulting economy abuses the yield guarantee to issue more debt.

Riding the strain

So, while the ECB mulls over potential post-APP instruments, Borghi continues to pursue No Euro dreams, even if not Italy-related. He believes European states wishing to leave the eurozone must be free to do so in an “orderly way”, through a “smooth” exit that prevents domino-effect market havoc. The euro club cannot be a prison, nor a one-way privilege ticket; the ECB might add that nor can it be a cash cow complicit in economic imprudence via bailouts and debt cancellation. For Borghi, that’s why having an exit contingency plan is always handy.

Silvia Marchetti is a Rome-based journalist covering finance, economics and culture. She writes regularly for the BBC, CNN, Newsweek, The Telegraph, The Guardian and Spear’s