October 27, 2018 / 5:13 PM / 8 months ago

Bundesbank official says Italy could issue "solidarity bonds"

BERLIN, Oct 27 (Reuters) - A senior official at Germany’s Bundesbank has suggested that Italy introduce ‘national solidarity bonds’ which wealthy Italians would be required to buy to dig their government out of debt.

The idea - sure to be controversial in Rome - would aim to tap Italian wealth tied up in property to relieve the government of much of the debt burden that drives up Italy’s cost of borrowing and makes it vulnerable to financial markets.

The Italian government is facing a backlash from the European Commission over its plans to increase spending despite its large debt burden, in a standoff that has even stoked some fears Italy might leave the euro area.

“Italy is not a poor country. It does not have to be the plaything of financial markets,” Karsten Wendorff, chief of the Bundesbank’s public finances department wrote in an editorial for Saturday’s edition of the Frankfurter Allgemeine Zeitung.

Wendorff proposed setting up an Italian state fund, financed by the solidarity bonds, to buy national government bonds.

“The Italian population would be obliged to acquire the solidarity bonds depending, for example, on the net wealth of households,” Wendorff wrote.

The Bundesbank is the most hawkish of the euro zone’s 19 national central banks and regularly calls for a ‘liability union’, in which members are responsible for their own finances, and warns against turning the euro area into a fiscal union.

With a ‘solidarity rate’ of 20 percent - the proportion of net household assets to be invested in bonds - and a tax allowance of 50,000 euros ($57,000), almost half of Italy’s government debt could be converted into solidarity bonds, Wendorff wrote.

“The banking system would be relieved of risks from the high government debt and the banking-state nexus would be significantly moderated,” Wendorff added. “A national problem would be solved with national solidarity.”

European Central Bank President Mario Draghi, himself an Italian, said on Thursday that a recent sell-off in Italian government bonds was set to dent the capital of Italy’s banks, which own about 375 billion euros worth of that paper.

On Friday, Draghi defended his independence as members of the Italian ruling coalition attacked him over “improper” remarks about the country’s political situation.

$1 = 0.8771 euros Writing by Paul Carrel Editing by Clelia Oziel

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