It’s no secret that Italy is running out of cash. Much like in the US, some US states are in better shape than others financially. The US federal government has one extra trick up its sleeve. The feds can go to their friends at the federal Reserve and ask them to print more money. The individual states can’t do that. So they are under much greater pressure to live within their means. 

In the European Union, individual countries that had control over their currency could print money at will and inflate their way out of their short term financial troubles. 

Italy’s populist leaders are discussing paying public-sector suppliers with IOUs instead of Euros. Some who oppose European controls have proposed this as the starting point for a new currency in case Italy has to leave Europe’s currency union.

The heads of the League Party and the 5 Star Movement, which make up the governing coalition in Rome, want to assess the idea of paying off government arrears using IOUs with denominations as small as €50 ($56), dubbed “Mini-BOTs” after Italy’s BOT treasury bills. BOT is an acronym that stands for BOT (Buoni Ordinari del Tesoro, or loosely translated Ordinary Treasury Bonds. 

“One can debate the instrument…it’s a proposal. But the urgent need to pay the tens of billions of euros of public-administration arrears to companies and families should be clear to all,” Matteo Salvini, head of the far-right League party, said Sunday.

Italy’s finance minister, Giovanni Tria, has tried and failed to stop the discussion, arguing that the IOUs would be either an illegal parallel currency, or they would be extra government debt at a time when Rome is struggling to rein in its deficit.

So the question simply is, when is a piece of paper considered currency? 

Is a US T-bill as good as cash? What is the difference between a one dollar bill that is essentially a government IOU. It says on the front face of the dollar bill, “Federal Reserve Note”. It then goes on to say “This note is legal tender for all debts public and private “.

It used to say “This certifies that there is on deposit in the treasury of the United States of America one dollar in silver payable to the bearer on demand. But that was when our currency was actually money and backed by tangible hard assets. That’s an entirely separate discussion. 

So let’s go back to Italy. Italian government bonds currently have a yield of 2.35%. This compares with US treasuries at 2.15%. Considering the additional risk associated with fiscal management in Italy, such a small risk premium seems inappropriate to me. 

Claudio Borghi, chairman of the budget committee of Italy’s lower house of parliament, has said such small-denomination IOUs could be a fallback instrument for Italy’s economy in case of a clash with eurozone authorities. Mr. Borghi tweeted on Sunday that the European Central Bank forced Greece into submission in 2015 “in a shameful humiliation of democracy. I would like to avoid this to my country.”

European officials last week called for disciplinary proceedings against Italy for flouting fiscal rules. Italy’s national debt stands at 132% of gross domestic product and is projected to rise above 135% next year. Among developed countries, only Greece and Japan have higher government debt ratios. Unlike euro members, Japan borrows in a national currency that it can print. Japan’s debt is currently priced at negative 0.11%. Here too, the pricing seems out of whack. 

I’ve been predicting for some time that the next financial crisis will be caused by a sovereign debt crisis that spills into the global financial markets. The signs will appear slowly at first and then quickly when the realization kicks in that the problem has no solution.