Why Investors Flinch Over Italy’s Mini-Bills Plan

Many things are unclear about the idea that Italy’s government could issue what would amount to small-denomination IOUs to pay some of its bills. How would the so-called mini-BOTs work? Are they a clever way of giving the country’s sluggish economy a boost? Would they amount to a parallel currency to the euro, or even a prelude to leaving it? Are they a sly way of getting around the European Union’s rules on debt? One thing is sure: markets don’t like any of these possibilities.

So far, just an idea. The original proposal called for the creation of small-value notes (from 1 euro to 500 euros) that would be issued to meet overdue payments to government suppliers. They could also be issued as credits for up to 25,000 euros each ($28,300) to taxpayers entitled to refunds. Like an IOU from the government, mini-BOTs would pay no interest and have no due date. They would be guaranteed by the state and would be accepted by the government for the payment of taxes. There would be no obligation for third parties to accept them. The name is a play on BOT, or Buoni Ordinari del Tesoro, a common short-term Italian Treasury bill.