Opinion of the European Central Bank of 30 December 2022 on Italy’s participation in the International Monetary Fund’s Resilience and Sustainability Trust (CON/2022/46)

OPINION OF THE EUROPEAN CENTRAL BANK of 30 December 2022 on Italy’s participation in the International Monetary Fund’s Resilience and Sustainability Trust (CON/2022/46) Introduction and legal basis

On 22 December 2022, the European Central Bank (ECB) received a request from the Italian Ministry of Economy and Finance for an opinion on a draft legislative provision (hereinafter the ‘draft legislative provision’) included in the Italian Law on the budget for the year 2023 and for the multi-year period 2023- 25. The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft legislative provision relates to the Banca d’Italia. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft legislative provision

1.1 Background context The draft legislative provision makes provision for Italy’s participation in the Resilience and Sustainability Trust (RST) of the International Monetary Fund (IMF). The RST was established by the IMF’s Executive Board on 13 April 2022, with effect from 1 May 2022. It is a loan-based trust. The RST resources are mobilised on a voluntary basis from members with strong external positions who wish to channel their special drawing rights (SDRs) or currencies to support low-income and vulnerable middle-income countries. The RST complements the IMF’s existing lending toolkit by focusing on longer-term structural challenges that entail significant macroeconomic risks, such as climate change and pandemic preparedness . The draft legislative provision is accompanied by an explanatory memorandum which provides additional details. With regard to the financial architecture of the RST, the explanatory memorandum clarifies that the RST has three financial pillars: a loan account, a reserve account, and a deposit account . 1.2 Contribution to the RST loan and deposit accounts The draft legislative provision authorises the Banca d’Italia to enter into a loan agreement to contribute to the RST, for an amount up to SDR 1.89 billion. According to the explanatory memorandum, the

contribution will be allocated to the loan account (SDR 1,575 million) and the deposit account (SDR 315 million). The draft legislative provision further provides for a State guarantee to the Banca d’Italia in respect of the reimbursement of principal and interest due on the contribution to the RST loan and deposit accounts . 1.3 Contribution to the RST reserve account The draft legislative provision authorises the Ministry of Economy and Finance to enter into a loan agreement to contribute to the RST, for an amount up to EUR 50 million, equivalent to SDR 31.5 million, for 2023. According to the explanatory memorandum, the contribution will be allocated to the reserve account.

2. Monetary financing prohibition

2.1 Article 123(1) of the Treaty prohibits the national central banks (NCBs) from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Member States. This prohibition is however subject to certain exemptions contained in Council Regulation (EC) No 3603/93 . In particular, Article 7 of Regulation (EC) No 3603/93 provides that the financing by NCBs of obligations falling upon the public sector vis-à-vis the IMF is not regarded as a credit facility within the meaning of Article 123 of the Treaty. The fourteenth recital of Regulation (EC) No 3603/93 clarifies the rationale behind this exemption, stating that it is appropriate to authorise the financing by the NCBs of obligations falling upon the public sector vis-à-vis the IMF because such financing ‘results in foreign claims which have all the characteristics of reserve assets’. Therefore, the exemption in Article 7 of Regulation (EC) No 3603/93 must be interpreted in line with this rationale . 2.2 Reserve assets have been defined as those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for interventions in exchange markets to affect the currency exchange rate, and for other related purposes, such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing. Under this definition, reserve assets must be foreign currency assets and, other than gold bullion, must be claims on non-residents . The need for availability on demand to meet balance of payments financing needs and other related purposes implies that the credit quality and liquidity of the claims must be ensured . 2.3 The ECB understands that the draft legislative provision is accompanied by, and must be read in conjunction with, the explanatory memorandum which provides additional details. These documents provide an interpretation of how the draft legislative provision must be understood.

Contribution to the RST loan and deposit accounts

2.4 For the exemption laid down in Article 7 of Regulation (EC) No 3603/93 to apply to the contribution to the RST loan and deposit accounts envisaged by the draft legislative provision, the terms and conditions of the agreement with the IMF must provide for a potential early repayment of the principal amount of the resources borrowed from the Banca d’Italia. Under this arrangement, the SDRs channelled by the Banca d’Italia to the RST would be readily repayable, to meet balance of payments and reserve needs, so that the liquidity of the claims of the Banca d’Italia is safeguarded with a view to ensuring their reserve asset status . 2.5 Subject to the above arrangement, the ECB considers that the Banca d’Italia’s loan to the IMF’s RST set out in the draft legislative provision is compatible with the monetary financing prohibition, as it results in SDR-denominated claims of the Banca d’Italia against an IMF-administered trust that have all the characteristics of reserve assets .

Contribution to the RST reserve account

2.6 Regarding the contribution to the RST reserve account, the ECB recalls that this would need to be pre-funded by the Ministry of Economy and Finance, such that the contribution to the RST reserve account is in fact not financed by the Banca d’Italia. In this regard, the ECB recommends that the draft legislative provision is clarified to explicitly state that the Banca d’Italia is to provide the contribution to the RST reserve account only after it has received the necessary funds from the Ministry of Economy and Finance. At a minimum, the ECB expects that the procedures to be agreed between the IMF, the Banca d’Italia and the Ministry of Economy and Finance clarify that any financing of the Ministry’s loans to be channelled through the Banca d’Italia to the IMF would be prefinanced by the Ministry. In such circumstances the Banca d’Italia would only be executing the transfer of funds on the Ministry’s behalf. In such case, the transfer of funds to the IMF by the Banca d’Italia would not give rise to a credit facility within the meaning of Article 123(1) of the Treaty and Article 1(1)(b)(ii) of Regulation (EC) No 3603/93.

3. Financial independence

3.1 From the perspective of the financial independence required of an NCB in the European System of Central Banks under Article 130 of the Treaty , the ECB takes note of the guarantee provided by the State under the draft legislative provision with respect to the reimbursement of principal and interest on the RST loan . Also from that perspective, the ECB would welcome the pre-funding by the Ministry of Economy and Finance of the contribution to be provided to the RST reserve account.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 30 December 2022. [signed]

The President of the ECB

Christine LAGARDE