9 April 2020. As explained by Mario Draghi, the danger of having to stop production for 1-2 months for millions of workers is that companies will accumulate debts and go bankrupt. As a result, the economy would incur permanent damage, because a forced "vacation" would turn into a serious credit crunch, comparable to that of 2008-2009. The Italian government needs to intervene. But how? Cumulating piles of ordinary new debt could be very risky, given its already excessive level. I think a slightly more sophisticated solution would be desirable, as it would soften the future impact on the Italian taxpayers, without creating new tensions with Europe.
I propose that the government issue debt securities of very long duration (30 years) and distribute them free of charge and directly to companies in proportion to their annual turnover – for example, 2 months of lost turnover due to the emergency. Let us call these securities "Covid-bonds." Furthermore – and this is of crucial importance – all banks operating in Italy are obliged to accept these securities – the Covid-bonds – at their nominal value from any of the client companies that wish to deposit them. For example, the hypothetical entrepreneur who has been given 50,000 euros of securities by the state will be able to transform them into bank deposits of equal value under the condition that they continue to pay their employees and other creditor parties – so that companies do not sit with their deposit, but rather use it to carry on paying their employees/creditors. In this way, banks operating in Italy would do what Italy was asking of European partners: accepting Covid-bonds at their nominal value. For the banking system, the ask is only a matter of creating corresponding deposits in euros without hitting liquidity ceilings - because, in any crisis, the deposit multiplier is abnormally low: it is simply a matter of raising it to normal levels. Potential suspension of the convertibility of deposits into cash could be added, to protect banks from irrational bank runs.
With this simple method, we would force banks operating in Italy to also contribute to saving the Italian economy, without losing anything in the end. The government has already temporarily restricted the freedom of action of 60 million individuals: it seems right to me that banks, for the same reasons of national emergency, also witness a temporary suspension of some of their normal rights.
Guido Cozzo is Professor of Macroeconomics at the University of St.Gallen.
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