One of the hypotheses that will be discussed at the decisive European summit on 28-29 June will be that of setting up a "Redemption fund” (Erf), to which the portion of European public debt exceeding the 60% threshold should be transferred.
What would be the consequences, and what the advantages, for Italy of such a scenario? The London team of Mediobanca Securities, led by Antonio Guglielmi, tries to answer the question with a simulation based on some assumptions: a refinancing cost of the Erf equal to 3,25% per year, an average annual real growth rate of GDP in the eurozone of 1/1,5 percentage points, and an inflation rate of no more than 2%.
The Fund, in the elaborated model, would have, from the moment of establishment, a residual life of 25/30 years, a sufficient period to "redeem" the excess quotas. For Italy it would be a question of conferring the greater portion with 949 billion euros: about 40% of the total, which would amount to 2300 billion if the countries already under joint protection of the IMF and the EU (Portugal, Ireland, Greece) were excluded from the Fund.
The benefits would be substantial: for the share transferred, the country would obtain savings on refinancing of up to 24 billion a year (1,5% of GDP). We would enjoy it more than Spain (0,3% of GDP) by virtue of the lower weight of Madrid's share, while Germany would have to bear an extra cost equal to 0,4% of the product.
But all that glitters is not gold: the acceding countries would be subject to strict conditionality: a part of tax revenues it should be intended to repay the maturing shares of the transferred stock, so as to cancel the total load within the established deadlines.
States should too immobilize collateral as a guarantee of the Erf, equal to at least 20% of the transferred amount. The collateral would be "unlocked" only when "expiation" is reached.
Mediobanca estimates that, for Italy, during the Erf's first years of activity, approx 8% of tax revenues should be subservient to the redemption mechanism, but the percentage would decrease over time, falling to less than 3% in the last decade of the Fund's life.
In terms of budget, the constraints on expenditure would be stringent. And the draconian cuts: if the ERF had come into effect in 2011, Italy would have cut spending by as much as 16 percentage points, while it would require a primary surplus equal - on average - to 4% per year, for more than two decades, in order to fully redeem one's share.
Suffice it to say that, with the sacrifices made by the Italians in 2011, the surplus net of interest was equal to 1% of GDP.
Of course, this is still an estimate, but indicative of the approximate costs of such a strategy. In the past, Italy has already shown that it can maintain primary surpluses for extended periods, but blocking the budget for almost three decades seems to be a huge challenge, also from the point of view politician.
On the other hand, the Fiscal Compact already provides for the reduction of the quota exceeding the 60% limit. Therefore, at least from the point of view of refinancing, the Redemption Fund would save a large amount of interest. It should also be noted that guaranteeing the Fund public assets for 20% of the share transferred (in the Italian case 190 billion euros) would leave a large margin for placing significant portions of state-owned properties on the market.
For this reason, according to Guglielmi, a plan for drastic reduction of the debt stock, to be carried out by means of disposals of public assets, could support the Erf, reducing the budget rigor year by year, and the sacrifices for taxpayers.
