Mini-BOTs, the Monster Under the Bed for European Investors

They may be called mini-BOTs, but they are no small matter for European investors.

The proposal of the Five Star and League parties to assess the feasibility of paying state arrears with short-dated notes of small denominations has sent risk premiums on Italian assets soaring. Analysts fear an issuance of mini-BOTs would, among other things, constitute the issuance of a parallel currency.

Below is a selection of analyst views on the topic of mini-BOTs:

Credit Agricole

• The speculation around the issuance of mini-BOTs is “among the key reasons for the euro weakness and the sell-off in the BTP market,” says head of G-10 currency research, Valentin Marinov
• “The use of the paper for payments of government liabilities could fuel concerns about Italy’s fiscal sustainability and even the country’s membership in the euro zone”
• Such an issuance could stoke fears about Italy trying to sidestep EU public spending and borrowing restrictions
• Among the more damaging implications could be a slowdown in the progress toward a euro-area banking union
• “All of that should continue to make investors cautious in their outlook for EUR and BTPs at present”

Toronto-Dominion Bank

• “There is more concern that the new government might increase issuance in the front end, including the ideas of the mini-BOT,” strategist Richard Kelly says
  • “For many other trial balloons, there will be a sensitivity to the market reactions which likely restricts what can be passed through law. But there will be enough to leave investors more cautious than we’ve seen, especially when placed in the context of an ECB that is looking to move out of asset purchases”
• “We still need to be cautious on how much of what they are saying they can actually implement”

ING

• Latest area of concern is the idea these bills could be partly used to finance looser fiscal policy, says strategist Viraj Patel
• Anything seen as a de facto parallel currency would be a major negative development for the euro should any new Italian government seek to pursue it

BNY Mellon

• The idea has echoes of the planning that Greece allegedly undertook ahead of a possible exit of the euro area in 2015, says chief currency strategist Simon Derrick
• Mini-BOTs could increase the chance of Italy leaving the euro “just that tiny bit more”

UniCredit

• Mini-BOTs are a “pretty straightforward securitization of arrears,” replacing the previously troublesome idea of a parallel currency, says Group Chief Economist Erik Nielsen

— With assistance by Chiara Remondini, and Lorenzo Totaro