Financialization of the Italian state: at what cost?

The use of financial derivatives by the Italian government continues to appear in the headlines of global news media. Based on Eurostat data, Bloomberg has calculated that in 2015 derivatives-related net liabilities burdened Italy’s public debt by €6.8 billion. If we consider the entire 2012-15 period, the total burden goes up to €21.3 billion, a record in the Eurozone.  In addition to this, potential mark-to-market losses were approximately €42 billion during the second quarter of 2014. Italy’s total public debt in 2015 increased to almost €2.2 trillion (132% of gross domestic product), the largest in absolute terms in the Euro area.

Whilst the Italian Ministry of Economy and Finance plays down the impact of these derivatives losses on the stability of public finances, several journalists, politicians and academics are demanding more transparency in the management of public debt. The Italian Parliament is also working on a fact-finding investigation at the moment. Transparency in public debt management is a very important and legitimate request, however, it is a futile request unless we counteract those political-economic forces which are willing to use financial innovation to pursue statecraft objectives.  I call this phenomenon financialization of the state, because it exposes state affairs to the very same highly marketised and risk-oriented practices of present-day financial actors. To understand this phenomenon and its impact on contemporary Italian political economy requires looking back to decisions taken 30 years ago.

Beginning in the 1980s, the governments of many countries replaced their traditional methods of public debt management with a market-based approach. They followed the idea that the state should behave as any other actor in the marketplace.  In the case of Italy, pro-market experts at the Treasury and Bank of Italy implemented a series of key reforms: a) they diversified the range of government debt securities in favour of fixed-rate long-term bonds; b) they introduced competitive auctions without a base price in the primary market; c) they launched the MTS secondary market, which is today Europe’s leading electronic platform for fixed-income instruments; d) as an adjunct to MTS, they established a market for trading government bond derivatives; e) finally, in the same period, the Bank of Italy reduced its refinancing obligations with the Treasury and began adopting indirect monetary policy instruments.

Hence, by the mid 1990s, the Italian Treasury and Bank of Italy had fully adopted market-based methods in public debt management and trading. The newly established environment exhibited high levels of financialization in the sense that investors could enter or exit positions easily and could execute a wide range of innovative strategies based on short selling and risk hedging. What was initially a market for households, who invested in bonds by holding them until maturity, instead became a highly speculative arena in which large investors imposed financial discipline on the sovereign management of interest rates. Such an environment was established on the basis that Italy could have saved some fractions of a per cent in debt costs.  Under this operational framework, the Treasury began to act as a market participant that develops benchmark portfolios to attempt to capture the optimal trade-off between the costs and the risks of debt servicing.

But this was only part of the story. To be sure, the financialization of government bond markets and public debt management exposed government finances to the crisis-prone dynamics of global financial markets.  However, it also worked as a channel through which neoliberal minded Italian governments utilised new tools for managing statecraft in a finance-mediated manner and in support of a neoliberal hegemonic order.