Nine months ago, when the new Italian coalition formed a government, in their coalition agreement they made provision for a parallel currency, called a mini-bot. The idea is that once the mini-bot circulated widely enough in the Italian economy, the government would be able to switch the entire country to the new currency overnight.

Since then all has gone quiet on the parallel currency front, with the government more concerned about getting their budget through and making gains in the European elections.

Italy basically has a Plan A and a Plan B.

Plan A

Plan A is about the Five Star Movement and La Lega gaining seats in the European Parliament elections, and then making alliances elsewhere in Europe so that they can block the German EPP candidate Manfred Weber from becoming the head of the European Commission (it is the European Parliament that now selects the Commission Head). Juncker retires in the summer. They also want to have influence over who succeeds Mario Draghi as Governor of the European Central Bank later this year. Again, they want a dove not a hawk, but the Germans are intent on having Jens Weidman (currently head of the Bundesbank) as head of the ECB.

It's a long shot as to whether the Italians will succeed. It is true that there will be a surge of eurosceptics across Europe in the European Parliament elections. But not enough to block the hawks who are led by Germany and supported by the 17 countries in the New Hanseatic League (a league of northern fiscally hawkish countries). But the Italians have to give it a try, just so they can truthfully say to their voters that they made every attempt to reform Europe and loosen the noose around Italy from within. So the leader of Five Star, Di Maio, and the leader of La Lega, Salvini, are noisily trying to press their electoral advantage and win seats and make alliances.

Plan B

If they fail (which is likely - the EU is unreformable as Britain can attest), then Plan B kicks in.

Plan B is being handled by Prime Minister Conte and Finance Minister Tria who conducted the negotiations with the Commission to have their budget approved. They had a stroke of luck - the gilet jaunes humiliated the French President Macron, forcing him to blow his budget on appeasing them. The EU then realised they couldn't put Italy into an excessive deficit procedure (which involves crippling fines) without also doing the same to France, whose budget deficit is much worse than Italy's. So they backed down and approved the budget in December. The Italian senate then approved the budget in Jan and it has come into force. The Italian government now has breathing space for a year.

The next step is dealing with the legacy debt. Take a look at the following graph:

italian debt.jpg

That big spike on the left is the amount they have to roll over in 2019. The new govt did not inherit a good hand from previous governments.

But Tria is not complaining. Instead he is knuckling down and tapping the bond markets. He is also trying to borrow long term, so that future governments don't face so much to roll over each year. Signs so far are that he has been successful. He has managed to place some 15 and 30 year bonds, as well as have auctions for 7 and 10 year bonds.

He is also tapping the markets quite hard - there are bond auctions every two weeks. It's only the first week of March but he has raised nearly 30% of what he needs for the roll-overs this year already. If he continues at this pace, by the end of the year he will have raised what he needs for next year too.

This is important: all the drama the Italians have with the bond markets and "the spread" is because previous governments have borrowed so short-term that there is a relentless wall of debt that needs to be refinanced each year. If he can get ahead of that, then if there is turmoil in the markets next year it doesn't matter, as he will have already raised what he needs in advance.

I don't think he will even consider issuing the mini-bot parallel currency until he has rolled over a considerable amount of debt, so that he can weather any panic in the markets.

Then there is the issue of the Italian Presidency

The President

The Italian President functions much like Queen Elizabeth II does in the UK - a mainly symbolic position, but unlike QEII, he does tend to interfere as he did when he vetoed Professor Savona for the position of Finance Minister because Savona had made critical remarks about the flaws in the euro. President Mattarella's reasoning was that "the markets didn't like it" which is incredible as in democracies the markets shouldn't be selecting who holds positions in the government. There were also indications during the government's fight with the Commission, that he was looking for an excuse to call new elections on the grounds that the govt couldn't get a budget through. All of which is rather subversive.

Some commentators claim that La Lega doesn't mind early elections as they have surged in the polls. But they haven't surged enough to govern on their own, and would have to govern with Berlusconi's Forza Italia, who are europhiles. To achieve La Lega's eurosceptic goals it is better to stick to the coalition with Five Star at least until 2022 when President Mattarella's seven year term expires.

The President is elected by the Italian Senate, and Five Star and La Lega have a six seat majority in the senate, enabling them to choose the successor.

Because of this timetable, my feeling is that the Coalition will endure, and that they will concentrate for now on Plan A and trying to get a more favourable Commission and ECB. Meanwhile Finance Minister Tria will be trying to restructure Italy's legacy debt so that the government isn't at the mercy of the markets so much. When they can replace Mattarella in Feb 2022, then they will issue their parallel currency and the clock will starting ticking to exit the euro.