More than half of Italian companies reported that by the end of 2020, they faced the problem of a lack of liquidity, and 38% reported “operational and sustainable risk.” in accordance with A survey of 90,000 companies by the Italian National Institute of Statistics ISTAT.
Confcommercio Italian National Business Lobby, recently rated that 60% of restaurants and other enterprises lacked liquidity, and 30% complained about the additional costs of implementing measures to combat the infection so that they could begin to serve customers after blocking.
The tourism industry, which accounts for 13% of GDP and which has played a decisive role in keeping the Italian economy afloat over the past decade, providing jobs for approximately 4.2 million people, is in limbo. Borders have opened, but foreign tourists still remain elusive. And since this year many locals do not have the financial standing to go on vacation, it is unlikely that demand in the domestic market will increase as much as travel companies desperately hope.
Tourism was one of the few parts of the economy that has grown in recent years. For example, last year it grew by 2.8% while Italy’s industrial production fell by 2.4%In an economy that has not grown for more than 10 years, while public debt continues to grow at an alarming rate, its fastest growing sector has just suffered from all sledgehammers.
Italy’s manufacturing industry, which was already struggling before the crisis, is also in trouble. In April, when Italy found itself in the grip of one of the most serious blockages in Europe, the Istat Industrial Turnover Index plunged by 46.9%, while the index of unadjusted industrial orders decreased by 49.0% compared with the same month of the previous year. Since then, many enterprises have opened, but activity remains low.
To keep the calm, many companies need a loan. But this is easier said than done in Italy, if you are not a multi-billion dollar company. Automobile giant Fiat Chrysler is on the verge of getting a government loan of 6.3 billion euros – more than any other European automaker. Even Atlantia, the company that operated and maintained the Morandi Bridge in Genoa, which collapsed in 2018, killing 43 people, hopes to receive a loan from the government in the amount of 1.7 billion euros,
Meanwhile, hundreds of thousands of small businesses continue to wait. In the early days of the crisis, the Conti government announced that it would provide debt guarantees to finance enterprises up to 740 billion euros. However, by May 20, only 301,777 of the 607,391 requests for assistance were granted, according to report bicameral commission of inquiry of Italy. (The accepted request does not mean that the loan is actually issued).
For those companies that have fallen into the cracks of the Italian emergency lending system, many of which worked perfectly with the coronavirus before the crisis, the temptation to go hand in hand with mafia loan sharks, who are more than happy to help. In Calabria, Ndrangheta “initially comes up with low interest rates because their ultimate goal is to take over the business with usury and use it to launder their illicit proceeds,” says state prosecutor Nicola Gratteri.
Even before this crisis began, Italy’s dilapidated banking system and endless swamps of bureaucracy made obtaining a commercial bank loan an almost impossible task — with the exception of legions of zombie firms that owed huge amounts of debt to banks that they would never repay, and which will be periodically rebuilt. During the last crisis, the share of industry capital in zombie companies has more than halved, from 7% to 19% between 2007 and 2013, in accordance with OECD Something similar, but on a larger scale, is likely to happen by the end of this crisis.
And this is the last thing the Italian economy and the banking system need. Despite tremendous cleaning efforts in recent years, non-performing loans (past due loans) still have 7% of Italy’s total loans, one of the highest rates in Europe. This is up from almost 17% five years ago thanks to the massive securitization of Italian non-performing loans. It is expected that investors in these securitized distressed loans will receive their profit mainly on the basis of the proceeds from the sale of basic collateral.
The securitization process depended on two basic conditions that are now in question:
1. investor willingness to invest in sliced and diced toxic debt in Italian; and
2. The ability of debt collectors to recover and sell underlying assets.
The lock made state 2 almost impossible. Courts were closed. The Italian housing market, where collateral for housing-related loans was to be sold, was stopped. And debt collectors could not contact the borrowers to even agree on partial payments on outstanding loans.
If fees in Italy continue to fall, the income received may not be enough to pay out to investors who bought securitized non-performing loans. In this case, according to Wall street journalinvestors in mezzanine and junior securities will lose their investments, and the Italian government, which is already questioning the financial situation that guaranteed senior securities to make deals attractive, will have to pay part of the costs.
Soon, the Italian banking system will be embraced by a new wave of non-performing loans, as legions of companies, households and individuals do not pay their debts in the post-blockage era. When this happens, and overdue debt ratios in Italy’s banking sector again rise sharply to double digits, just as Italy’s securitized bad credit market begins to crumble, Italy’s banking system will not only return to where it was in around 2015, but will still worse place.
The Italian government is already in a fiscal situation. By the end of this year, its debt will already increase to 155–160% of GDP, compared with 136% last year as a result of three simultaneous processes: a significant increase in government spending to counter the virus crisis, a dizzying decline in tax revenues and a sharp decline in GDP.
If the Italian government is unable to cope with the approaching tsunami of bad debts, external assistance will soon be needed. Other members of the Eurozone will be in the same boat, so the ECB talking quietly about creating a bad bank to “store” hundreds of billions of euros of unpaid debt. Obtaining the blessing of some countries of Northern Europe, in particular Germany, will not be easy for this scheme, especially given the current confrontation between the German Constitutional Court and the ECB. But for the Italian economy, time is of the utmost importance.
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