Why Mini-BOTs Loom Large for Investors in Italy Assets

Italy’s newly ascendant populist parties sent jitters across Europe’s debt markets by proposing a new class of short-dated government notes that would be created specifically to pay state arrears. The idea spooked investors who see it as akin to issuing a parallel currency that would further dent the country’s fiscal sustainability. Italian bonds pared some of the past week’s losses, with 10-year yields retracing from the highest intraday levels in more than a year, while the premium to cover a default in the nation’s debt is the stiffest since October.

The anti-establishment Five Star Movement and the anti-immigrant League, which have agreed to rule Italy as a coalition, released a contract that includes the idea for a type of government IOU. Its name -- mini-BOT -- is a play on BOT, or Buoni Ordinari del Tesoro, a common Italian Treasury bill or short-term credit note. The two parties are considering the creation of new small-value notes (EU1 to EU500) to meet payments to suppliers and creditors that have accumulated as arrears, up to 25,000 euros each ($29,000). Like an IOU from the government, a mini-BOT would pay no interest and have no due date.