The necessity of find resources to finance the large deficits caused by the Coronavirus emergency, when the expansive monetary conditions end, has been fueling for a few weeks financial illusionism. Sons of this spasmodic research and the consequent illusions are the so-called perpetual bonds; bonds, that is, without maturity, which correspond coupons theoretically fixed at infinity. Bocconi economists spoke about it in March Francesco Giavazzi and Guido Tabellini on the site lavoce.info, then it was the turn of the Spanish premier, Pedro Sanchez, to propose in April to issue perpetual bonds to finance a 1,5 trillion euro recovery fund and, lately, was the president of Consob, Paolo Savona to relaunch, on the occasion of its meeting with the financial market last Tuesday, perpetual bonds as a "war measure", a circumstance to which Covid-19 is often assimilated.
But dreams end at dawn and miracles are not around the corner. There will be a reason why there aren't any perpetual bonds around the world today, even if there are 100-year bonds that are close relatives. But, as Lorenzo Bini Smaghi, former member of the board of the ECB and now president of Societé Generale, wrote in the Foglio last Saturday, it is no coincidence that the question about "who pays?” perpetual bonds and that the idea of creating a win-win operation for the State (and therefore for taxpayers) and savers remains a chimera. Or why rates are set to rise and convenience for taxpayers to fall or why savers run the serious risk of a real boomerang. “Without a convincing answer to the legitimate question of who pays – writes Bini Smaghi – there is a fear that the cost will be high, not only for future generations. And this is in fact the story of the last twenty years, which runs the risk of repeating itself”.
An accurate survey of the few merits and the many faults of perpetual bonds, their risks and their opportunities, was carried out a few weeks ago for the Observatory on Italian public accounts, known as the Cottarelli Observatory, by Giampaolo Galli and Federica Paudice. “Apparently the issue of securities without redemption and at a relatively low rate – reads the report by the two economists – seems attractive and has the effect of spread the costs of the crisis also on future generations. The theory and history, both ancient and recent, of very long-term or even perpetual securities - write Galli and Paudice - however warn us about the risks of these securities“, which are basically four: market riskslinked to interest rate fluctuations; risk of default, risk of loss of purchasing power due to inflation and illiquidity risks. And to offset those risks is likely the interest rate on irredeemable securities is higher than that prevailing for securities with a maturity date“. The first risk invests the State and therefore the taxpayers, the others concern the investors.
But the merit of Galli and Paudice's report is that it does not limit itself to examining the various theoretical hypotheses underlying perpetual or 100-year bonds but is above all accompanied by an analytical review of four concrete experiences – two two today and two of the past – of very long-term bonds. All failures.
To remain in our times, the first case mentioned is that of theAustria that in September of 2017 has launched on the market a 100-year bond at a rate originally of 2,1% and then in June of 2019 of 1,171%. Initially, those who bought the bond in September 2017 at 100 euros made a huge capital gain because the price rose to 210 euros (with a yield of 0,61%), but then immediately followed a drop to 168 euros with a 20% loss in just two months.
The second recent example of perpetual bonds is that of the so-called Argentine Methusalem, which seemed to be a great success when Buenos Aires was able to place 100-year dollar bonds for 2,75 billion at a coupon rate of 7,125%. But last April, when the risk of default was looming, the price of that bond issued at 100 had dropped to 29 cents, corresponding to a yield of 27%. In September 2019 the Argentine Matursalem bond already had lost the 55%.
For the past, the report by Galli and Paudice takes into consideration the first perpetual bond issued by England in the mid-700th century and the launched one in Italy in 1926 by Fascismthrough debt consolidation. In 1751, the British government created the first mutual (or consol) bond which guaranteed a 3% yield on the value of 100 pounds indefinitely and which was widely used. But its end was inglorious: in 2015, when the curtain fell on the consul, whoever inherited that title purchased for 100 pounds in 1751, would have found himself in his pocket – due to inflation – only a value of £0,5 for every 100 originally purchased.
The outcome of the littorio perpetual bond launched in 1926 by Mussolini was also unhappy, through the forced consolidation of Treasury securities with a maximum duration of 7 years into securities with a six-monthly coupon, without repayment and a 5% yield. The goal was to revalue the lira (the famous 90 quota) but after a few months the depreciation of the perpetual bond was already 30% with serious losses for banks and savers. In 1934, new forced conversion of 25-year bonds. The final result of the operation of the fascist regime was disastrous: 100 lire invested in the public debt in 1926 were worth only 3 lire twenty years later.
Sometimes numbers speak louder than words.
