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Monday, 11 March 2013

Italy is severely hit by the credit crisis. One third of the Italian companies is strapped for cash and might default eventually

Alarming news in the Italian newspaper La Repubblica, yesterday: one third of the Italian companies is seriously strapped for cash and might even default, eventually. This became clear from an investigation, executed by the Research Center of Confindustria, an important Italian lobby group for the industry.

The most prominent and economically powerful member of the PIIGS countries, Italy, is in serious financial trouble currently. The mighty industrial nation-in-distress is severely hit by the credit crisis. This does not only apply to the majority of middle-class Italians, but also to numerous Italian companies.

The Italian banks keep their hands firmly in their pockets and hoard cash, in order to improve their solvability and liquidity levels, forced by the Basel III regulation. 

This forced 'frugality' of the banks leaves hundreds of thousands of companies seriously strapped for cash. Here are the pertinent snips from the story in La Repubblica, translated from Italian to English by me (with some help of Google Translate):

The Italian industrial lobby association La Confindustria declared a grave warning: the total value of industrial stockpiles in Italy has lowered by €46 billion in 2012. “The credit crisis that we are currently experiencing, is without precedent”.  

One third of Italian companies is seriously strapped for cash and runs the risk of closing down and defaulting. These are the consequences of the merciless credit crunch: banks that refuse to lend money in an economy that resides in the worst crisis since the Second World War, without a visible exit. 

The Research Center of Confindustria launched this alarm at the same day that the Banca d’Italia confirms the prolonged presence of the credit crisis. In January 2013, the number of handed out loans dropped by 1.6% year on year, the largest percentage in fourteen months. The president of the industrials, Giorgio Squinzi, stated: the country needs more than ever a new, stable government that can take countermeasures in order to stimulate the economy and create enough new jobs.

Confindustria states that the Italian economy is paralyzed, due to a lack of credit. For over a year, the number of loans has been dropping: by -5% since the peak of September, 2011. The total value of industrial stockpiles dropped by €46 billion. “An unprecedented event, since the Second World War”, according to the Research Center.

There are currently two developments that block the distribution of loans and credit: 

1. The Basel III regulations force banks to maintain higher capitalization rates, leaving less available money for investments and loans. 

2. On top of that, decisions about the distribution of credit and loans are increasingly taken at the headoffices of banks, based on standards and business practices that have very little in common with the reality of industrial projects. In other words, the banks lost touch with the daily needs and business practices of companies.

The limited availability of cash hits everybody, almost without exceptions. Even companies which make healthy profits are deprived from credit and cash. According to data of the United Italian Chambers of Commerce, 1000 companies per day(!) were forced to close down in 2012, 24,000 more than the previous year. 

More than 6500 industrial companies disappeared, leading to a serious reduction in production capacity. These numbers were the results of measures, which were meant to help the banks. However, currently these measures lead to a strong increase in the number of non-performing loans (i.e. loans that won’t be returned), according to the Banca d’Italia: to 17.5% in January from 16.6% in December. This is also a result of the crisis.

In contrary to the other PIIGS-countries, Italy is an industrial giant with a large number of manufacturing industries that produce world-class products in food and non-food sectors. The most famous of these products are special food and dairy products, cars from the Fiat group (Ferrari, Alfa Romeo and Fiat), state-of-the-art furniture,  designer clothes and home appliances of exceptional quality.

Especially the northern part of the country, with the cities Milan, Turin and Bologna, is an industrial zone par excellence. If northern Italy would be a separate country with a stable, incorruptable government, like the populist Lega Nord wants, the country would undoubtedly be the Germany of southern Europe.

However, in my opinion there are two problems that keep Italy as a whole in an awkward financial situation:

  • The southern part of Italy (beneath Rome) still hasn’t got the economic viability and industrial stamina of the northern part of the country. Due to the ubiquitous corruption, the widespread organized crime and the lack of official jobs and economic prosperity, this part of the country is a bottomless pit that sucks up a disproportionate part of state finances, without yielding the necessary returns on these investments.

    Although the amount of black money, earned through corruption and organized crime in South-Italy, is probably more than the total GDP of a small eastern European country, this is (of course) not counted in the official economic statistics and brings only benefits to a few, powerful and influential people;
  • Since the Second World War, the governments of Italy, irrespective of those having a leftwing or rightwing signature, have mostly been unstable and weak and often hopelessly corrupted.

    Many Italian Prime Ministers, Members of Parliament, Senators and other leaders of repute had either strong ties with organized crime in Italy or have been in the government and parliament to ‘help themselves’. Seldomly, the public interest and well-being of Italy has been their ‘Leitmotiv’. 

You could think, after reading the aforementioned article, that the economic problems of Italy really started in 2008/2009, when the credit and banking crisis hit the coasts of Europe. However, this is far from the truth.

Like I already showed through the Italian exports chart in yesterday’s article and also in earlier articles on Italy (click f.i. here and here), the economic problems of Italy are of much older origin. They are also much harder to solve than by simply electing an incorruptable and capable government and just restoring the old credit lines, like the article seems to suggest.

When East and West Germany were merged together in the nineties, the costs of this proces were almost enough to bring the resulting Federal Republic of Germany to its knees financially and economically. 

On top of that, you should realize one thing: East-Germany had been a communist vassal state with many desperate and paranoid inhabitants, who mistrusted everyone and especially their West-German neighbours. Nevertheless, the country never suffered from the widespread corruption and organized crime that Italy accomodates. Most Germans from East and West Germany were basically honest people that were looking for a honest life (just like the vast majority of normal, middle- and lower-class Italians, by the way). 

Still, it took Germany 15 years of economic hardship and large sacrifices to restore prosperity and economic success in the whole country.

The Italian corruption, which spread over all levels of government, non-profit industries and commercial business life, and the worrisome state of the southern half of Italy, present challenges that cannot be solved within ten or even twenty years.

In my opinion, Italy needs at least 30 years of stable governments, in combination with serious crime and corruption fighting, in order to become the country that it could be.

Until then, the Northern Italian manufacturing industry and business life will be the cork that keeps the country (barely) afloat; that is, if the enduring credit crisis, the narrowminded European Council and the reluctant lending policy of the Italian banks will not make an end to this successful part of Italy. Such events would deprive the world from products that couldn’t be made anywhere else. 

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