by Lorenzo Codogno and Giampaolo Galli, 22 novembre 2020
Much has already been said to explain why it is not wise to cancel the debt of Eurozone Member States in the portfolio of the ECB. What has perhaps not been argued clearly enough is why cancellation would not be a good idea even for a high-debt country like Italy.
There are two key points. The first is that the cancellation of government bonds held by the Eurosystem would be useless because it would give rise to a simple reallocation of funds. Member States would stop paying interest and principal to the Eurosystem, and this would stop passing the resulting profits back to the Member States. ECB profits are passed on to the national central banks and, together with those flowing directly to them, to the States. It is for this reason that this year the Bank of Italy paid the Treasury the substantial sum of 7.9 billion (excluding taxes), equal to 13% of the interest expenditure on public debt in 2019. Therefore, nothing would change in the income statement of the State. From the point of view of the balance sheet, gross debt would be reduced. However, there would be a parallel decrease in Eurosystem’s capital, due to the losses in the portfolios. If the capital reduction were significant, the States would have to put their hand into their pocket to recapitalise the ECB or the national central banks.
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