THE EURO CHANGEOVER IN ITALY

UNCLAS SECTION 01 OF 04 ROME 001091

SIPDIS

BRUSSELS ALSO FOR USEU
DEPT FOR EUR/WE, EUR/ERA
DEPT PASS TREAS FOR OASIA HARLOW, JONES
STATE PASS FRB FOR GUST

E.O. 12958: N/A
TAGS: ECON EFIN IT EUN
SUBJECT: THE EURO CHANGEOVER IN ITALY

REF: (A) 2002 MILAN 14 (B) 01 ROME 6222
(C) 01 MILAN 728 (D) 01 MILAN 666

THIS REPLACES ROME 01059 DATED FEBRUARY 28, 2002, WHICH WAS
CANCELLED.


1. SUMMARY: ITALYS TRANSITION TO THE EURO WENT SMOOTHLY, WITH
ONLY A FEW SNAGS PRINCIPALLY IN THE SOUTH. ITALIANS STOPPED
USING LIRE ON FEBRUARY 28, ALTHOUGH THE BANKING ASSOCIATION,
AT THE REQUEST OF THE BANK OF ITALY, HAS EXTENDED THE DEADLINE
FOR EXCHANGING LIRE FOR EUROS UNTIL JUNE 30. OPINIONS ARE
MIXED ABOUT THE INFLATIONARY IMPACT OF THE CHANGEOVER.
OFFICIAL DATA SHOW A MODEST IMPACT, WHILE CONSUMER
ASSOCIATIONS ARGUE THAT THE INFLATIONARY EFFECT WAS FAR
HIGHER, BUT NOT CAPTURED BY OFFICIAL STATISTICS. ITALYS FIRST
COUNTERFEIT EUROS HAVE BEEN FOUND. END SUMMARY.

A LONG CHANGEOVER
--------------


2. THE ITALIAN EURO CHANGEOVER PERIOD WAS ONE OF THE LONGEST
AMONG THE 12 EU COUNTRIES THAT ADOPTED THE NEW CURRENCY.
GERMANY, NETHERLANDS, IRELAND AND FRANCE ALREADY FINISHED
THEIR CHANGEOVER. ITALY WAS TO HAVE FINISHED BY FEBRUARY 28,
BUT, AT THE REQUEST OF THE CENTRAL BANK, THE ITALIAN BANKING
ASSOCIATION EXTENDED THE CHANGEOVER PERIOD FOR FOUR ADDITIONAL
MONTHS UNTIL THE END OF JUNE. THE EURO WILL BE THE ONLY LEGAL
CURRENCY IN ITALY STARTING MARCH 1, BUT CUSTOMERS MAY CHANGE
LIRE INTO EUROS, FREE OF CHARGE, AT BANKS UNTIL JUNE 30.
THERE WILL BE SOME CONDITIONS: THE MAXIMUM ALLOWED PER
EXCHANGE WILL BE 1,000,000 LIRE (516 EURO) PER DAY FOR
CHECKING ACCOUNT HOLDERS BUT ONLY 500,000 (258 EURO) DAILY FOR
OTHER CUSTOMERS. LARGER TRANSACTIONS WILL REQUIRE MORE
NOTICE. POST OFFICES, WHICH ACCEPT CURRENCY PAYMENTS FOR
UTILITIES, SAVINGS PLANS, ETC., ARE CONSIDERING EXTENDING THE
CHANGEOVER PERIOD. AFTER MID-JUNE, CUSTOMERS MAY STILL CHANGE
LIRE INTO EUROS AT BANK OF ITALY BRANCHES UNTIL FEBRUARY 2012,
FREE OF CHARGE.


3. ITALY IS NOT THE ONLY COUNTRY OF THE EURO-ZONE THAT HAS
EXTENDED THE CHANGEOVER PERIOD FOR BANKS. BANKS IN FRANCE,
LUXEMBOURG, PORTUGAL, AND SPAIN WILL EXCHANGE NATIONAL
CURRENCY FOR EUROS, FREE OF CHARGES, UNTIL END-JUNE. ANOTHER
FOUR COUNTRIES (AUSTRIA, FINLAND, GREECE AND IRELAND) ARE
DISCUSSING A POSSIBLE EXTENSION. IN THE NETHERLANDS, EXCHANGE
WILL BE POSSIBLE UNTIL THE END OF 2002.

CHANGEOVER DATA
--------------


4. THE ITALIAN CHANGEOVER WENT SMOOTHLY, BUT THERE ARE STILL
LIRE BANKNOTE CIRCULATING, NOTICEABLY IN SUPERMARKETS,
SHOPPING CENTERS, MALLS AND RESTAURANTS. THE OVERALL VALUE OF
LIRE CIRCULATING IN ITALY AT THE END OF 2001 WAS 120 TRILLION
LIRE, EQUIVALENT TO 62 BILLION EURO. ACCORDING TO THE BANK OF
ITALY, MORE THAN 1.6 BILLION LIRE BANKNOTE HAVE BEEN WITHDRAWN
FROM CIRCULATION, VALUED AT ABOUT 90 TRILLION LIRE (46.5
BILLION EURO). THERE ARE REMAINING 30 TRILLION LIRE (15.5
BILLION EURO) OR 25 PERCENT OF LIRE VALUE STILL IN
CIRCULATION. MOST LARGE LIRE BANKNOTES HAVE BEEN EXCHANGED
FOR EUROS. DESPITE THE SUCCESS OF THE CHANGEOVER, 1.6 BILLION
LIRE IN BANKNOTES ARE EXPECTED TO REMAIN IN CIRCULATION AFTER
FEBRUARY 28, MOSTLY IN SMALL DENOMINATIONS. THE EXTENSION OF
THE LIRA/EURO EXCHANGE DEADLINE IS EXPECTED TO HELP SMALL
SHOPKEEPERS, THE ELDERLY AND OTHER GROUPS THAT HAVE BEEN SLOW
TO ACCEPT THE EURO CHANGEOVER.


5. ACCORDING TO THE ITALIAN BANKING ASSOCIATION, DURING THE
CHANGEOVER, ITALIAN BANKS HAVE WITHDRAWN 100 TRILLION LIRE
(51.6 BILLION EURO) SO FAR AND ARE EXPECTED TO WITHDRAW
ANOTHER 110 TRILLION (56.8 BILLION EURO) BY THE END OF
FEBRUARY. (COMMENT: THE DATA REFER TO LIQUIDITY CONVERTED FROM
LIRE TO EURO SO FAR, WITH NO IMPACT ON OVERALL LIQUIDITY.)

INCREASE OF CREDIT CARD USE
--------------


6. CREDIT CARD USE IN ITALY HAS INCREASED SIGNIFICANTLY IN
THE PAST SIX MONTHS. ACCORDING TO LUCIANA STRIPPOLI OF
AMERICAN EXPRESS ITALY, THE NUMBER OF AMEX CARDS REQUESTED IN
2001 GREW BY 35 PERCENT, WITH THE LARGEST INCREASE REGISTERED
IN THE LAST QUARTER OF THE YEAR, RIGHT BEFORE THE EUROS
INTRODUCTION. THE NUMBER OF TRANSACTIONS WITH AMEX CREDIT
CARDS INCREASED BY 20 PERCENT IN JANUARY 2002 OVER THE
CORRESPONDING MONTH IN 2001. STRIPPOLI SAID THAT IT IS HARD
TO QUANTIFY THE IMPACT OF THE INTRODUCTION OF THE EURO, BUT
BELIEVES MOST CONSUMERS REQUESTED A CREDIT CARD BECAUSE THEY
FELT MORE SECURE USING A CARD INSTEAD OF CASH. MAURIZIO
CARTOCCI, MANAGING DIRECTOR OF SERVIZI INTERBANCARI, ITALYS
FIRST ISSUER OF CREDIT CARDS, SAID THERE WAS AN INCREASE IN
CREDIT CARD TRANSACTIONS OF 15-18 PERCENT IN THE FIRST WEEKS
OF THE YEAR. SSB (SOCIETY OF BANKING SERVICES) SAID THAT
TRANSACTIONS USING DEBIT CARDS REGISTERED A 57 PERCENT
INCREASE IN THE FIRST WEEKS OF THE EURO.

ONE- AND TWO-CENT COINS DEBATE
--------------


7. LATE IN JANUARY, ECONOMY MINISTER GIULIO TREMONTI
MENTIONED THAT GOI IS CONSIDERING FOLLOWING FINLANDS LEAD AND
ELIMINATING ITS SMALLEST EURO COINS. TREMONTI TOLD REPORTERS
THAT GETTING RID OF THE TINY ONE- AND TWO-CENT COINS WOULD
CERTAINLY WIN THE FAVOR OF ITALIAN CITIZENS AND SAID HE WAS
CAREFULLY CONSIDERING THE IDEA. BUT THE MINISTER, WHO WAS
CRITICIZED AS A EURO-SKEPTIC IN THE WAKE OF HIS COOL
RESPONSE TO THE INTRODUCTION OF THE NEW SINGLE CURRENCY,
STRESSED THAT SUCH DECISIONS SHOULD NOT BE UNILATERAL. CALLS
FOR SUCH A PRACTICE ARE GAINING MOMENTUM IN ITALY. THE MAYOR
OF THE NORTHEASTERN CITY OF TREVISO, GIANCARLO GENTILINI, SAID
THAT HE HAD WRITTEN TO TREMONTI URGING THE ELIMINATION OF THE
COINS. GENTILINI SAID HE HAD HAD NUMEROUS COMPLAINTS FROM
CITIZENS EXASPERATED BY THESE TWO MICROSCOPIC COINS. OUR
WALLETS ARE ALREADY STUFFED TO OVERFLOWING WITH THE BIGGER
COINS. THE CENTS WERE FINE BEFORE WORLD WAR II, WHEN MANY
PEOPLE DIED WITHOUT EVER TASTING THE JOY OF HANDLING A
THOUSAND LIRE BANKNOTE.


8. GIANCARLO DEL BUFALO, OF THE EURO COMMITTEE OF THE
MINISTRY OF ECONOMY AND FINANCE, DEFENDED THE EURO-CENTS,
WHICH ALLOWED A MORE PRECISE CONVERSION OF LIRE PRICES INTO
EURO PRICES. ECHOING THE OPINION OF FINANCE MINISTRY
UNDERSECRETARY VITO TANZI, DEL BUFALO SAID THE MARKET WOULD BE
THE ULTIMATE ARBITRATOR OF THE TYPE OF COINS USED.

PUBLIC OPINION
--------------


9. ACCORDING TO A MID-FEBRUARY SURVEY BY THE UNION OF ITALIAN
CHAMBERS OF COMMERCE AND THE POLLING COMPANY TAGLIACARNE
INSTITUTE, THE CHANGEOVER WAS SMOOTH. THE SUPPLY OF EUROS IN
BANK CHANNELS WAS SUFFICIENT IN MOST CASES: ONLY 17 PERCENT OF
THOSE POLLED HAD PROBLEMS WITH OBTAINING EUROS AT BANKS. POST
OFFICES DID EVEN BETTER: ONLY 11 PERCENT OF THOSE POLLED HAD
PROBLEMS OBTAINING EUROS AT POST OFFICES. WITH RESPECT TO
PRICE HIKES, 37 PERCENT SAID THAT EURO PRICES FOR GOODS AND
SERVICES HAD INCREASED FROM THE LIRE PRICES. (THIS CONTRASTS
WITH A MUCH GREATER NUMBER -- 55 PERCENT OF THOSE SURVEYED
WHO SAID IN JANUARY THAT EURO PRICES WERE HIGHER.) THE POLL
SHOWED A LARGE DIFFERENCE BETWEEN NORTHERN AND SOUTHERN ITALY
IN TERMS OF EURO SUPPLY AND PRICE INCREASES. FORTY-ONE
PERCENT OF THOSE SURVEYED IN THE SOUTH SAID THEY HAD
SIGNIFICANT DIFFICULTIES AT THE POST OFFICE, WHILE ANOTHER 32
PERCENT SIGNALED THE SAME DIFFICULTIES AT BANKS. SEVENTY-
SEVEN PERCENT OF THE SAMPLE SURVEYED IN THE SOUTH LAMENTED
UNJUSTIFIED PRICE INCREASES.


10. IN THE SOUTH, LONG LINES AT BANKS AND POST OFFICES
PERSISTED THROUGH THE END OF JANUARY. EVEN AS THE FEBRUARY 28
DEADLINE APPROACHED, MANY TRANSACTIONS IN SMALL SHOPS WERE
STILL BEING CARRIED OUT IN LIRE. TAXIMETERS, WHICH HAD BEEN
CONVERTED TO EUROS IN ROME SOON AFTER THE NEW YEAR, STILL
SHOWED PRICES IN LIRE IN NAPLES AS RECENTLY AS LATE FEBRUARY.
SHOPKEEPERS IN NAPLES FREQUENTLY HAVE PROBLEMS MAKING CHANGE,
AS MOST CASH DRAWERS CONTAIN FAR MORE LIRE THAN EUROS.
DESPITE THE INITIAL CONFUSION, AND THE CONTINUING RESISTANCE
TO THE NEW CURRENCY, BANCO DI NAPOLI OFFICIALS MINIMIZED THE
PROBLEMS WITH THE CHANGEOVER IN THE SOUTH. THEY BELIEVE THAT
THE PROCESS OF ADAPTATION WILL ACCELERATE QUICKLY ONCE THE
LIRA LOSES ITS VALUE AS LEGAL TENDER.

INFLATIONARY IMPACT OF THE CHANGEOVER
--------------


11. ANECDOTAL EVIDENCE SHOWS THAT, IN SEVERAL SECTORS, PRICES
WERE ROUNDED UP TO FACILITATE THE EURO CONVERSION. ONLY AFTER
FIRST QUARTER RESULTS ARE IN WILL A MORE COMPLETE PICTURE BE
POSSIBLE. OFFICIAL STATISTICS INDICATE A 0.5 PERCENT INCREASE
IN PRICES FROM THE PREVIOUS MONTH BOTH IN JANUARY AND
FEBRUARY. IN PARTICULAR, PRICE FIGURES FROM TWENTY ITALIAN
CITIES, RELEASED ON FEBRUARY 21, INDICATE THAT THE YEAR-TO-
YEAR INFLATION RATE INCREASED FROM 2.4 PERCENT IN DECEMBER AND
JANUARY TO 2.5 PERCENT IN FEBRUARY. CENTRAL BANK CONTACTS SAY
A 0.7 PERCENT INCREASE IN INFLATION IS LIKELY IN THE FIRST
QUARTER BECAUSE OF THIS ROUNDING UP. THIS INCREASE WILL NOT BE
EASILY ABSORBED DURING THE YEAR AND COULD PUSH THE YEARLY
AVERAGE INFLATION RATE CLOSE TO TWO PERCENT. THERE WAS SOME
ROUNDING DOWN AS WELL, WHICH COMPENSATED FOR A SMALL AMOUNT OF
THE ROUNDING UP.


12. THE RESEARCH DEPARTMENT OF ITALYS LARGEST INDUSTRIAL
ASSOCIATION, CONFINDUSTRIA, CONSIDERS THE ACCELERATION OF
INFLATION A TEMPORARY EFFECT OF THE CHANGEOVER, AND BELIEVES
THAT THE DECELERATION WILL START IN THE NEXT TWO MONTHS.
HOWEVER, AS A RESULT OF THE FIRST TWO MONTHS OF 2002, THE
CONFINDUSTRIA ESTIMATE OF AN INFLATION RATE OF 1.5 PERCENT IN
2002 HAS HAD TO BE REVISED UPWARD TO ABOUT 2.0 PERCENT. THE
MINISTRY OF ECONOMY AND FINANCE AND THE MINISTRY OF PRODUCTIVE
ACTIVITIES CONTINUE TO TRUST IN THE ANTI-INFLATIONARY
MECHANISMS SET UP BY THE GOI, AND PREDICT THAT THE CHANGEOVER
WILL HAVE ONLY A MODEST INFLATIONARY IMPACT. OTHER GOI
CONTACTS PREDICT THAT ADDITIONAL PRICE INCREASES MAY OCCUR ON
MARCH 1, WHEN THE LIRA IS TAKEN OUT OF CIRCULATION. CARLO
RIENZI, PRESIDENT OF THE LEADING CONSUMER ASSOCIATION,
CODACONS, FORESEES SUBSTANTIAL PRICE INCREASES STARTING MARCH
1, WHEN LIRE PRICES WILL NO LONGER BE POSTED FOR COMPARISON.
FROM THAT DAY, JUNGLE LAW WILL PREVAIL, RIENZI SAID.


13. THE CONSUMER ASSOCIATIONS, ADICONSUM, CODACONS AND UNIONE
CONSUMATORI, SAY THAT THE INFLATIONARY IMPACT IS HIGHER THAN
THE GOI HAS REPORTED. THESE ASSOCIATIONS PLAN TO APPEAL TO
ISTAT, THE CENTRAL INSTITUTE OF STATISTICS, WHICH IS IN CHARGE
OF THE CALCULATION AND THE PUBLICATION OF THE PRICE DATA,
REQUESTING THE COMPOSITION OF THE NEW INDEX AND THE
METHODOLOGY FOR CALCULATION OF PRICE INCREASES. ACCORDING TO
THE ASSOCIATIONS, THE JANUARY DATA DO NOT MEASURE THE REAL
INFLATIONARY IMPACT OF THE EURO CHANGEOVER, WHICH, THEY SAY,
MAY EQUAL AN AVERAGE INFLATION OF THREE PERCENT THIS YEAR.
THE ASSOCIATIONS ESTIMATE THAT PRICES WILL INCREASE BY 14
PERCENT IN 2002 ON AVERAGE, WITH A LOSS OF PURCHASING POWER OF
557.77 EURO (USD 490) A YEAR PER HOUSEHOLD, APPROXIMATELY 40
TO 50 EUROS PER MONTH. THE CONSUMER ASSOCIATIONS RECENTLY
PUBLISHED A PAMPHLET HIGHLIGHTING PRICE INCREASES. HIGHWAY
TOLLS ROSE BY 2.21 PERCENT, NATIONAL TELEVISION FEES BY 1.46
PERCENT, LOTTERY TICKET PRICES BY 1.6 PERCENT FROM 5,000 LIRE
(EURO 2.58) TO THREE EUROS. IN MILAN, PUBLIC TRANSPORTATION
TICKETS INCREASED BY 29.1 PERCENT, FROM 1,500 LIRE (EURO 0.77)
TO ONE EURO.

MONEY-LAUNDERING AND COUNTERFEITING
--------------


14. THE EURO HAS BLACK-MARKET BENEFITS THAT THE DOLLAR CANNOT
MATCH. THE SINGLE CURRENCY GLIDES WITHOUT A TRACE ACROSS A
NEWLY BORDER-LESS EUROPE IN BILLS DENOMINATED IN LARGE VALUES
SCARCELY SEEN IN THE REGION. THE E500 NOTE THE HIGHEST
DENOMINATION - IS ALSO ABOUT FIVE TIMES THE VALUE OF THE
LARGEST DOLLAR NOTE IN CIRCULATION, THE USD 100 BILL. WHETHER
MEASURED BY WEIGHT OR VOLUME, THIS MEANS MORE EUROS CAN BE
JAMMED INTO A BRIEFCASE THAN DOLLARS OR OLD EUROPEAN
CURRENCIES. ACCORDING TO THE MINISTRY OF ECONOMY AND FINANCE,
THE ARRIVAL OF THE EURO INCREASED THE RISKS OF MONEY-
LAUNDERING. THE PERIOD OF DOUBLE CIRCULATION LIRA-EURO
REPRESENTS THE LAST CHANCE FOR HOLDERS OF ITALIAN LIRE OF
ILLICIT ORIGIN TO TRY TO RECYCLE THROUGH THE CONVERSION IN
EURO OR THROUGH THE PURCHASE OF GOODS AND INVESTMENTS.


15. ON FEBRUARY 19, LAW ENFORCEMENT OFFICIALS SEIZED NEAR
ROME 25,000 COUNTERFEIT 50 AND 200 EURO BANKNOTES. THIS IS
THE FIRST SEIZURE OF COUNTERFEIT BANKNOTES IN ITALY, WHICH
WERE APPARENTLY OF HIGH QUALITY. COMMENT: THERE HAS NOT BEEN
A NOTABLE INCREASE IN COUNTERFEIT CURRENCY IN ITALY. LAW
ENFORCEMENT OFFICIALS AT POST AND IN ITALY IN GENERAL --
SAID THAT THEY EXPECTED A SIGNIFICANT UPSWING IN COUNTERFEIT
EUROS IN THE FIRST WEEKS AFTER ITS INTRODUCTION, AS
COUNTERFEITERS TESTED THE MARKETS AWARENESS ABOUT THE
EUROS APPEARANCE. HOWEVER, THE EUROS SECURITY FEATURES SEEM
TO HAVE DISSUADED COUNTERFEITING, LAW ENFORCEMENT OFFICIALS AT
POST COMMENTED.

THE THAI THREAT & OTHER STORIES
--------------


16. THE EURO HAS ITS DOUBLES. THANKS TO THE SIMILARITY
BETWEEN THE OLD 500 LIRE COINS AND THE TWO-EURO COINS (BOTH
BI-METALLIC AND WITH ALMOST THE SAME WEIGHT) IN THE FIRST DAYS
OF THE CHANGEOVER, MANY OLD 500 LIRE COINS HAVE BEEN ACCEPTED
FOR SMALL PAYMENTS IN PLACE OF THE TWO-EURO COINS. THE 500-
LIRE COIN IS VERY SIMILAR, BUT IS WORTH ONLY ONE-EIGHTH (26
EURO CENTS) OF A TWO-EURO COIN.


17. UNFORTUNATELY, THERE IS ANOTHER THREAT. THE THAI 10-BAHT
COIN IS A PERFECT TWIN OF THE TWO-EURO COIN, BUT IS WORTH ONLY
25 EURO CENTS. ANECDOTALLY, WE HAVE HEARD THAT SOME TEN-BAHT
COINS HAVE BEEN USED IN AUTOMATIC CIGARETTE AND BEVERAGE
DISPENSING MACHINES.

ROME MISCELLANY
--------------


18. LESS THAN ONE THIRD OF ROMES 365 AUTOMATIC BUS TICKET
DISPENSERS ACCEPT EURO COINS. ATAC, THE ROME CITY
TRANSPORTATION AGENCY, PROMISED THAT ALL WOULD ACCEPT EUROS BY
THE END OF FEBRUARY. AN ESTIMATED FIVE-PERCENT OF GASOLINE
STATIONS DID NOT ACCEPT EURO BANKNOTES BY THE END OF FEBRUARY.
BY MARCH 1, ALL PARKING METERS WILL ACCEPT THE EURO.

COMMENT
--------------


19. DESPITE THE INITIAL INCONVENIENCE, THE ITALIAN TRANSITION
WAS SMOOTHER AND FASTER THAN EXPECTED AND MORE ITALIANS
ACCEPTED EUROS EARLIER THAN EXPECTED. TOO MANY SMALL LIRE
BANKNOTES STILL CIRCULATE OR AT LEAST REMAIN TO BE EXCHANGED.
THE BANKING ASSOCIATIONS DECISION TO PROLONG THE ACCEPTANCE
PERIOD FOR LIRE SEEMS WISE, GIVEN THE 1.6 BILLION LIRA
BANKNOTES (WITH AN OVERALL VALUE OF 15.5 BILLION EURO) IN
CIRCULATION. THE ORIGINAL FEBRUARY 28 DEADLINE FOR EXCHANGING
THESE NOTES MIGHT HAVE MEANT A LAST MINUTE CRUNCH, WHICH COULD
HAVE CAUSED SERIOUS DELAYS IN BANKS AND POST OFFICES. WE ARE
MONITORING THE INFLATIONARY IMPACT OF THE CHANGE TO EUROS, AND
WILL CONTINUE TO DO SO IN THE MONTHS AHEAD. WE WILL ALSO KEEP
ON EYE ON WHETHER THERE IS ANY DOWNWARD PRESSURE ON PRICES (OR
INCREASED DEMAND FOR GREATER EFFICIENCIES) AS ITALIANS BEGIN
TO NOTICE COST DIFFERENTIALS FOR THEIR HIGH-PRICED GOODS AND
SERVICES COMPARED TO THEIR EURO-ZONE NEIGHBORS. END COMMENT

SEMBLER