An Italian Regulator's Risk-Sharing Plan To "Cure The Eurozone"

Authored by Mike Shedlock via,

Marcello Minenna, a division head at the Italian securities regulator, emailed his plan to "Cure the Eurozone". 

Marcello Minenna, the head of Quantitative Analysis and Financial Innovation at Consob, the Italian securities regulator, pinged me recently with his plan to save the Eurozone.

The plan requires debt guarantees with a catch: The catch is the guarantees have a price: The riskiest countries have to pony up the most for debt insurance.

His thoughts are in a downloadable PDF on Curing the Eurozone. A slightly different version can also be found on FT Alphaville: Getting to Eurobonds by reforming the ESM.

Minenna notes the "European Stability Mechanism (ESM) has subscribed capital of €704bn but only 11.4 per cent of that has been paid-in; the remainder is callable shares. Thus, the Mechanism runs a large gap between subscribed capital and paid-in capital. Should the Board of Governors call in authorized unpaid capital (€625bn), ESM members would have to quickly meet the call with additional contributions."

Minenna proposes a risk-sharing agreement whereby riskier countries pay insurance premiums to the ESM in the form of capital injections.

Cost Benefit Italian Case

For Italy, the total cost of the guarantee would be €56bn to be spread over a 10-year horizon, but starting from the third year this cost would be more than offset by the savings in interest expenditure.

Over ten years, Italy would pay an estimated €56bn to the ESM in the form of insurance premiums. The associated public investments would increase Italy’s GDP by a cumulative €150bn.

At the end of the 10th year all debt will be fully risk-shared.

"The extra payments to the ESM would be a challenge, but they would be a big improvement to the current situation, where, because of the fiscal compact, the danger of rate hikes and the over-prudential discipline on non-performing loans, finance has stopped flowing to the real economy and the public budget has lost €100bn of tax revenues from banks and businesses," claims Minenna.

Debt Mutualization


In his email, Minenna proposed "ESM leverage capability could be used to give a financial backing to public investments within peripheral Eurozone areas, in order to benefit of large fiscal multipliers usually exhibited by less developed regions."


  1. The Maastricht Treaty which led to the creation of the Euro, does not allow such schemes. Germany has resisted all such schemes.
  2. Germany and some of its neighbours would experience a deterioration of their creditworthiness because of the joint responsibility on the shared debt of the other states.
  3. Minenna likely underestimates the amount of insurance required, perhaps by a lot, if debt debt volatility picks up.
  4. Minenna likely underestimates the amount of debt once such a scheme is hatched.
  5. Why might debt and volatility increase? Precisely because of the leverage Minenna espouses. Italy benefits only if debt or interest on debt does not soar.
  6. Minenna's solution does not fix any key fundamental problems. One interest rate policy cannot serve 19 masters. There are huge productivity differences between various Eurozone countries.
  7. Target2 is fatally flawed by design. No amount of insurance can possibly solve the fundamental point that Italy will never be able to pay creditors, primarily Germany.

Target2 Analysis

The latest numbers show Germany is owed €848.4 billion, primarily by Italy and Spain.

I struggle to see how these amounts can ever be paid back, insurance or not. If insurance is price correctly, Italy cannot afford it.

Debt Mutualization Key Points

Here are two essential points that Minenna never states explicitly.

  • What cannot be paid back, won't be paid back.
  • One way or another Germany will pay substantially.

Minenna's insurance scheme kicks the can still more, perhaps buying more time for some German politician to come into office who realizes the mathematical certainty of the above bullet points.

If Germany were to agree to an insurance scheme, we have the beginnings of debt mutualization in which debtors start defaulting on payments owed, for which insurance will never fully cover.

There are two and only two ways this ends.

  1. Germany agrees to restructure the amounts it is owed.
  2. Some country, likely Itlay, says to hell with it all, leaves the Eurozone, and starts a cascade of defaults.

If Germany were to accept Minenna's proposal, that would be a step in the direction of point number 1.

The political problem is Germany does not accept my two previous bullet points as a matter of fact.

Until Germany accepts it cannot be paid back and until a German chancellor is willing to take the heat for admitting the truth, the can-kicking insurance scheme cannot gain any traction.

As long as Germany believes it can and will be paid back in full by creditors, it is unlikely to accept any insurance schemes, debt mutualization schemes, or eurobonds.

Politically, Germany may not be willing to accept such schemes (even if it does accept my points), until it is well understood that some country is about to default.

Insurance Icing

I freely admit that Minenna seeks a solution that makes a eurozone superstate possible, whereas the Libertarian in me hopes the thing blows sky high.

Nonetheless, I honestly appraised his proposal. I think his proposal is well thought out, in general.

However, Minenna needs to explain how anything substantial can happen without a treaty change that every Eurozone country has to approve.

Even if such a thing could happen, how long would it take?

This is not a matter of me wanting one thing and him another. This is about political realities regarding German acceptance of what a genuine solution entails as well as political realities and timelines that suggest it cannot realistically happen given that it takes 100% agreement among 19 nations to do nearly anything at all.

This is yet another fundamental Eurozone flaw. Meanwhile, the political and economic clocks keep ticking.



NoDebt Thu, 12/07/2017 - 07:27 Permalink

If you knew your house was going to burn down tomorrow you'd desperately want to buy an insurance policy on it today, too.Barn door: closed.Horses: long gone. 

Ghordius Five Star Thu, 12/07/2017 - 08:01 Permalink

worst in growth is like saying: "that plane isn't climbing"

well, if Italy was a plane... then we are talking about how high? same height as... Russia? higher then... nearly any other country, except for half a dozen?

ah, I forgot. place here still full of Dr. Krugman's "You Either Grow Or Die" Apostles

that's true, btw. If you are a tumor or a squid, that is

In reply to by Five Star

css1971 Thu, 12/07/2017 - 07:27 Permalink

So the most likely to default countries will pay the most for insurance so that bondholders who bought their bonds can hold them without risk.So the risk is moved from private sector to public... Profits privatised and losses socialised.Let the further rape of the taxpayer commence forthwith!

Ghordius onthedeschutes Thu, 12/07/2017 - 07:40 Permalink

those clubs don't work that way. nobody can "disband" them. what you can, though, is get your country out of them

hence your call is just... impotent. try this template, it works better:

"I, Insert Name Here, Citizen of Insert Country Here, want My Country to Exit Insert Org Here"

see Nigel "Mr. Brexit" Farage, he got his referendum and with a bit of push the UK might leave the EU next March

(Brexit? interestingly... not on ZH, recently)

In reply to by onthedeschutes

falak pema Ghordius Thu, 12/07/2017 - 09:22 Permalink

Macron and Italy are not the only ones now pointing to financial solidarity as being the ONLY way out given the systemic risk of private + government debt in Italy+ Spain and counterparty risk in Germany/France.Schulz has now openly proclaimed that his intention if called into a coalition would be to make the United states of Europe a prime objective for 2025; saying the last 4 years of Schauble type financial policy is now unsustainable.So... moar pressure builds up as the Duck says Sayonara to Eu and  FU to the rest of the world!… will be a gamechanger if Mutti buys into it.

In reply to by Ghordius

Ghordius Thu, 12/07/2017 - 07:33 Permalink

one key sentence to the article:

"I freely admit that Minenna seeks a solution that makes a eurozone superstate possible, whereas the Libertarian in me hopes the thing blows sky high."

now... Minenna "pinged" Mish. knowing about that "Mish Hope". meh

just explain this part to me: what exactly is "Libertarian" about American Cousins hoping that "things blow sky high"... in the eurozone? aka "somewhere else"?

the superstate that isn't? but that Minenna wishes for, and propagates, and Mish... helps in propagating?

nope. years and years spent here trying to understand, and I still don't. perhaps I am too dense for that

JohnGaltUk Thu, 12/07/2017 - 08:01 Permalink

"Minenna notes the "European Stability Mechanism (ESM) has subscribed capital of €704bn but only 11.4 per cent of that has been paid-in;"So the fund has not been funded, like the wests pension schemes.Let me know how that one works out for ya.

adonisdemilo Thu, 12/07/2017 - 08:42 Permalink

More smoke and mirrors.Just because they've got a Euro printing press doesn't mean they aren't bankrupt and not only in cash terms but of ethics, probity, decency and honour, which coincidentaly qualifies them for a place on the European Commission.

Ghordius Thu, 12/07/2017 - 08:50 Permalink

I nearly missed Mish's

"Target2 Analysis
On November 6, I reported Italy Target2 Imbalance Hits Record €432.5 Billion as Dwindling Trust in Banks Plunges.

The latest numbers show Germany is owed €848.4 billion, primarily by Italy and Spain."

ok. let's say you sell a house in Spain or Italy. then, you transfer your cash to a German bank. and let's say you buy Italian or Spanish sovereign bonds, or stocks

you increased T2. because you transferred non-German credit to Germany. by X

that X is still your stuff. now, where does that "owed" fit in, exactly? and those bonds/stocks? they don't count towards T2

ukipboy Thu, 12/07/2017 - 10:23 Permalink

In addition to a treaty-change along the lines of Maastricht or Lisbon, the solution of mutually insuring the debt of all other Eurozone nations also requires a constitutional change in Germany. The original founders of AfD, a group of university professors, brought a case to the German Constitutional Court in Karlsruhe in 2011 about the financial obligations of Germany to the Eurozone. What the court ruled was that if the German parliament (the Bundestag) voted to send money to another member of the Eurozone (for example Greece), that was legal. But the German government cannot permanently delegate to a European institution (such as the ECB) the power to send German taxpayers' money outside Germany. That would be a violation of the current constitution and would require Germany to pass a new constitution to make it…