When you step through the main entrance at the Rome headquarters of CDP in Via Goito, the first thing you notice is a digital countdown clock. This tells you in continuously updated detail how much time the Cassa has left to implement its grand plan to breathe life into Italy’s moribund economy.
When Euromoneyvisited, the clock indicated that CDP, which is 80% owned by the Italian government had 1732 days, or 149,656,308 seconds to achieve its objective. The Cassa will certainly have its hands full over that time. After all, Italy’s National Promotional Institution acts as a “key instrument for the central government to implement its financial policies,” according to Standard & Poor’s (S&P). That is quite a responsibility.
On paper, CDP’s blueprint for supporting economic growth over the next five years is a good plan. If it is implemented successfully, the plan will make a meaningful contribution to the recovery of the Italian economy and to job creation in a country where youth unemployment, in particular, remains high. It will also help Italy to strengthen its capital market, overhaul much of its crumbling infrastructure and attract foreign direct investment.
|Guidelines business plan 2020|
|Source: Cassa Depositi e Prestiti|
The bare bones of the scheme, which were announced at the end of last year, are that between now and 2020 new resources amounting to more than €260 billion ($294 billion) will be channelled into various pockets of the Italian economy. Some €160 billion of this will come from CDP’s own resources, most of which are generated from savings deposited at the Italian postal bank. The rest, according to CDP’s business plan, will be made up of “additional national and foreign private and public sources.”
Fabio Gallia, CDP
The bulk of this total (€163 billion) is earmarked for investment in “enterprises”, which CDP’s CEO, Fabio Gallia, says have been neglected in Italy. “We see the shortage of venture capital as a clear market failure in the Italian economy,” he says. “Only Greece lags behind Italy in this area. CDP will aim to work with enterprises across their entire life cycle – from birth through to a possible IPO.”
Of the balance of the funding plans set out in the 2016-20 plan, €68 billion will go into infrastructure, which CDP says will help Italy to “raise its game” in bridging the gap between its infrastructure and the rest of Europe’s. This leaves €20 billion for local governments and €15 billion to put towards real estate, which includes housing and tourism.
Italy needs every penny. True, its economy is on the mend, with recent industrial production and consumption data surprising on the upside. Equally true, the longer term outlook has been brightened by the programme of structural reforms introduced in 2012, most notably in the labour market. The OECD thinks that within five years of their introduction, this bundle of initiatives will lead to GDP being 3.5% higher than it would have been in the absence of reforms. Over the same period, the OECD expects that 340,000 new jobs will be created.
Despite the good news, Italy remains an economic headache for Europe’s fragile economic union. “High government debt and protracted weak productivity dynamics imply risks going forward,” was the warning sounded in March by the European Commission (EC), which is jittery at the prospect of Italy failing to comply with 2016 Eurozone budget discipline requirements.
Its economic performance since joining the euro has done little to resolve Italy’s debt problem. As Lombard Street Research commented in a recent update, while the euro area has grown by 18% over the last 15 years, Italy’s real GDP has stagnated. Gallia, who took over as CEO of CDP last summer, is under no illusion about the damage that has been done to Italy’s economy since the global financial crisis. “The growth numbers were up last year, but in the eight years following the crisis we lost 10% of GDP,” he says. By 2014, he adds, car sales, cement production and turnover in the real estate market were all back to the low levels of the 1960s and 1970s.
Those losses will take a while to reverse, although Gallia is confident that Italy’s economy is sufficiently broad-shouldered to sustain a long-term recovery. “This is still the second largest manufacturing base in Europe,” he says. “The resilience of the economy is reflected in the fact that we went through the recent economic crisis without any public disorder.”
More immediately, one of Italy’s main priorities is to address the deep-seated problems in its banking industry. The most visible of these is the mountainous stock of non-performing loans (NPLs), which now represent about 23% of GDP. According to numbers published by Moody’s, this total has risen sharply from €132 billion in 2009 and €236 billion in 2012 to about €350 billion today, meaning that around 18% of the loans in the entire banking system are non-performing.
Italy’s answer to its NPL conundrum is a guarantee scheme (Garanzia Cartolarizzazione Sofferenze, or GACS). Lorenzo Codogno, former director general of Economic and Financial Analysis and Planning at the Ministry of Economy and Finance in Rome, thinks the Treasury’s initial estimates of how many dodgy loans will be shifted from banks’ balance sheets were “far too optimistic”. Codogno, who has recently set up an independent economic research company, LC Macro Advisors Limited, says the GACS initiative should be regarded as an additional instrument in the toolbox available to banks cleaning up their balance sheets, but not as a silver bullet.
The Italian banking industry’s non-performer in chief is the troubled Tuscan bank, Banca Monte dei Paschi di Siena (BMPS). According to research published by Mediobanca, BMPS had a non-performing exposure (NPE) ratio of 35.1% in 2015, which is projected to edge up to 35.3% this year. The loan portfolios of Italy’s two other systematically important institutions, Intesa Sanpaolo and Unicredit (with NPE ratios of 16.5% and 15.5% respectively in 2015), look positively clean in comparison.
For months, the government’s search for a white knight for BMPS has drawn a blank, with private sector candidates such as Intesa and Unicredit reportedly ruling themselves out. That, say local observers, may leave the government with little choice but to lean on CDP to play a role in supporting the clean-up of BMPS’s fragile balance sheet. “I believe CDP will end up stepping in because there is no other solution,” says Franceso Giavazzi, an economist at Boccini University.
Giavazzi was director general responsible for debt management and privatisation in the Italian Treasury between 1992 and 1994. He believes the precedent set prior to the sale of Banco di Napoli in 1997 could be a valuable lesson for the restructuring of BMPS. “Banco di Napoli had a huge pile of NPLs which the market valued at about five cents in the euro,” says Giavazzi. “We set up a special vehicle for those bad loans which were guaranteed by the Bank of Italy (which was not used) and 10 years later the vehicle was closed at a profit. There’s no reason why CDP can’t play a similar role in providing a guarantee for the BMPS NPLs today.”
Others agree that the support of CDP in the clean-up of BMPS’s balance sheet could be another critical piece in an Italian bank restructuring jigsaw. “The merger between Banco Popolare and BPM will take care of itself and Carige looks like it is going to consider an offer made by Apollo,” says one local analyst. “There is agreement among a number of Italian CEOs that the most obvious next step in the restructuring of the Italian banking sector is for CDP to play a role in the BMPS rescue and other troubled situations like Popolare di Vicenza and Veneto Banca.”
This seemed to take a step closer in April this year, when Italy announced the creation of a €5 billion recapitalization or bailout fund for the Italian banking sector. The fund, which is named Atlas, is to be supported by the country’s strongest banks, insurance companies and asset managers. CDP will also take a stake in the fund, although as one Rome-based observer says, this will be for a “minimal amount”.
Any involvement by CDP in the rehabilitation of the Italian banking sector will, however, still raise as many questions as answers. One of these will be on the subject of state aid. “Any intervention by CDP would have to be agreed and cleared by the EC in order to avoid triggering an enquiry into state aid,” says Antonio Guglielmi, Head of pan-European banking research at Mediobanca in London.
This is because CDP’s principal source of funding is the stash of deposits entrusted by Italian savers to the 13,200 branches of Italy’s postal bank, controlled by the recently privatized Poste Italiane. This gives CDP access to what is effectively a captive base of deposits from the Italian taxpayer.
Putting the troubled BPMS on a sounder footing will not be cheap. “BMPS has about €25 billion in NPLs and another €25 billion in doubtful loans,” says Guglielmi. The danger is that being called upon to help clean up €50 billion of assets may undermine CDP’s five year business plan long before the digital display in the Via Gioto building has completed its five-year countdown. “If CDP uses up part of its budget to provide a guarantee for BMPS’s bad debts it will significantly reduce its ability to do anything else,” says Giavazzi. “This is why I think CDP’s new investment plan may be wishful thinking.”
I am somewhat sceptical that the new CDP plan will change things substantially for the better, although it is certainly worth trying
Lorenzo Codogno, LC Macro Advisors
It is not surprising therefore that CDP’s Gallia has been quoted as saying that the Cassa will have “absolutely no role to play” in any BMPS rescue. That, however, may put him on a collision course with the government, given prime minister Renzi’s determination that CDP should play a more decisive role in supporting Italy’s economic recovery.
It was reportedly on the instructions of Italy’s energetic and reform-hungry prime minister that CDP’s previous chairman, Franco Bassanini, and its CEO, Giovanni Gorno Tempini, were removed from the helm of the Cassa last July. Bassanini was replaced by Claudio Costamagna, who was at Goldman Sachs between 1988 and 2006, latterly as chairman of the investment banking division for Europe, the Middle East and Africa. Gallia, meanwhile, had served as CEO of Banco di Roma and, most recently, as Country Head for Italy at BNP Paribas.
Bassanini served as minister of Public Administration and Regional Affairs in the late 1990s and is now in his mid-seventies, so it is perhaps unsurprising that he stepped down from his post after seven years as chairman. His term was due to end this year and he continues to serve as chairman of CDP Reti, an investment vehicle which manages CDP’s holdings in Snam and Terna in the energy sector.
While Bassanini is described by one Rome-based observer as “professorial”, Gorno Tempini has a very different character. Appointed CEO in May 2010, he began his career in the fixed income trading desk at JP Morgan in 1987, where he stayed until 2001, holding a number of managerial positions in London and Milan. Thereafter he served as CEO and managing director of Banco Caboto (now Banca IMI), and as head of Finance and Treasury at Banca Intesa (now Intesa Sanpaolo) before taking up his post at CDP.
Gorno Tempini was one of a number of investment bankers who have formed the managerial spine of the CDP group in recent years, injecting a more dynamic, private sector-oriented culture into an organization sometimes regarded as flat-footed and bureaucratic. Fondo Strategico Italiano (FSI), the direct investment arm which is 80% owned by CDP, is run by Maurizio Tamagnini, previously head of Southern European Corporate and Investment Banking at Bank of America Merrill Lynch. Elsewhere in the group, Leone Pattofatto spent eight years in charge of Italian M&A at Credit Suisse before being appointed Head of Equity Investments at CDP in 2013.
Gorno Tempini himself is keeping his counsel about the circumstances in which he left CDP, where he was understood to have been a well liked and respected. The official explanation for his departure is that he was too conservative for Prime Minister Renzi’s liking.
Some say that Gorno Tempini paid the price for his opposition to the suggestion that CDP be used to prop up ailing companies. Most notably, he is said to have dug his heels in over a requirement for CDP to support Italy’s troubled steel producer, Ilva. It is easy enough to grasp why the future of the loss-making company is politically sensitive, given its importance as an employer in southern Italy. Ilva employs 16,000 workers at its plant in Taranto in the Apulia region, where the unemployment rate in 2015 was 19.8%.
With a capacity of more than 10 million tonnes, the Taranto plant is the largest in the EU and accounts for about 40% of Italy’s steel production. But as the plant ranks among the EU’s 30 largest emitters of CO², according to the EC, it is a serious environmental liability. It has also been the subject of an EC enquiry into state aid. Ilva hardly looks like a suitable candidate for FSI’s portfolio, which has an explicit mandate predominantly to acquire “minority interests in companies with economic and financial soundness” and with “profitability and growth prospects.”
CDP will aim to work with enterprises across their entire life cycle – from birth through to a possible IPO
Fabio Gallia, Cassa Depositi e Prestiti
Against this backdrop, speculation that Renzi and Gorno Tempini fell out over the prime minister’s request that CDP provide some form of guarantee for Ilva is unsurprising. A key priority for CDP is to ensure that it retains its privileged position of enjoying what Standard & Poor’s (S&P) describes as an “integral link with the Italian government”, with most of its obligations explicitly guaranteed by the state. At the same time, under EU accounting rules those obligations are unconsolidated with the government’s debt. Given perennial concerns about Italy’s debt mountain, it is easy to see why both the Treasury and CDP are eager to ensure they do nothing to jeopardize the status quo.
“There is a limit to what CDP can do because it is outside the perimeter of the general government,” says Codogno. “Given Italy’s high debt-to-GDP ratio, it would be a disaster if CDP’s balance sheet was reclassified within the parameter of the public administration. Moreover, it has to be very careful not to excessively increase its leverage or its exposure to high-risk assets.”
This, think some economists, is why the appointment of investment bankers to head the CDP may be like trying to drive square pegs into round holes. “If the government believes that by changing the management there will be a complete change of policy at CDP, it is likely to be disappointed, as there are limitations related to the required financial equilibrium of the company,” says Codogno.
Eyebrows were raised last October when FSI took a 12.5% stake in the oil and gas company, Saipem, the value of which has nosedived over the last six months. The press release accompanying the investment insisted that it was “consistent with FSI’s objective to make medium-long term horizon investments in Italian global leaders”, but it also emphasized the social importance of the company. Saipem, the FSI release noted, directly employs 7,600 workers in Italy. Indirectly, as it purchases about €1.8 billion from local suppliers, it accounts for around 22,500 Italian jobs.
More recently, as part of its new business plan, CDP has announced a reorganization of FSI, which also suggests that the investment arm is broadening its mandate in support of less stable companies. “A new project is the establishment of a restructuring fund devoted to businesses that are still viable from an industrial standpoint but which have suffered since the financial crisis,” says Gallia. “This may be because of over-indebtedness, or because of poor management and the failure to implement a healthy succession plan.”
Even if it is spared from playing a role in propping up troubled companies in troubled sectors like steel, there may still be question marks over the total financing of CDP’s masterplan for Italy’s economic rehabilitation. The good news, say analysts, is that CDP’s principal source of funding remains stable and secure. True, Italians are saving less than they used to. According to numbers compiled by the OECD, in the second quarter of 2015 the savings rate among Italian households was 11.1% of gross disposable income, 3.9% points lower than the peak reached in early 2009. But Italian savings are still robust. According to a presentation delivered last year by Carlo Calenda, deputy minister of Economic Development, Italian households save more than their counterparts in the US, Germany and Canada.
If CDP’s evolving business plan means it needs to increase its dependence on wholesale funding, the good news is that QE will help it to do so at a fairly low cost
Antonio Guglielmi, Mediobanca
Alongside retail deposits and locally distributed savings bonds, analysts say that CDP can probably look to raise more in the international capital market. “Under QE [quantitative easing] the ECB can now buy bonds issued by this kind of state-guaranteed funding vehicle,” says Guglielmi at Mediobanca. “So if CDP’s evolving business plan means it needs to increase its dependence on wholesale funding, the good news is that QE will help it to do so at a fairly low cost.”
How the rest of the money will be raised is not clear, given that CDP does not provide a detailed breakdown of the likely sources of the external funding that is pivotal to the 2016-20 investment plan. CDP is banking on the EIB to provide a good chunk of the total, part of it within the framework of the Juncker Plan.
But Italy has a poor record of absorbing EU money efficiently. “It is well known that Italy does not take as much advantage of EU funds as it should,” says Codogno. A combination of technical incompetence at a local and national level, restrictions imposed by the internal stability pact and a shortage of feasible projects has meant that Italy has routinely failed to make full use of the EU funding available. “I am somewhat sceptical that the new CDP plan will change things substantially for the better, although it is certainly worth trying,” says Codogno. “At least it is a fresh new attempt.”
The other main source of support for the 2016-2020 investment plan is from local and foreign private sector investors. Gallia says that these are eager to invest in Italy. “The reform programme has given Italy new-found credibility among investors,” he says. “Just look at the evolution of our spreads, or at the huge interest that is being generated among overseas investors whenever a new infrastructure or industrial project is announced.”
Sceptics could argue that the performance of Italian government bond spreads over the last year or so have had more to do with QE than economic fundamentals. They could also contend that direct investors will think twice about channelling resources into economy which ranks below Belarus in the most recent World Bank Ease of Doing Business Index. If the same index is to be believed, it is easier to enforce contracts in Sierra Leone than it is in Italy.
Italians bridle at these rankings, which they say are nonsense. Gallia himself becomes especially animated when quizzed about Italy’s position in indices such as the World Bank’s. He insists that prime minister Renzi’s reform agenda will propel Italy up these rankings and that investors are already discounting a rapid improvement in the Italian business environment. “We’re definitely not worried about the prospects for inward investment,” he says. “We have visits on a daily basis from international investors who are hungry to inject capital into Italian projects. The problem is one of supply rather than demand, because we don’t have enough projects to satisfy the wall of money looking to come into the country.”
Gallia says that portfolio flows, both in debt and equity markets, will also play a pivotal role in supporting the CDP investment plan, which aims to foster the growth of a deeper and more diversified capital market. “We will be using credit enhancement and project bonds to bring more infrastructure projects to the capital market,” he explains. “We are also aiming to make more effective use of PPP [public-private partnership] which has played a key role in the development of infrastructure around the world.”