People queue for food in a street in Italy after stockpiling left many supermarket shelves bare
After the lockdowns in response to the coronavirus pandemic spread across Europe this March, bankers in Italy watched with rising anger and frustration as other states announced massive guarantee programmes for new loans.
German finance minister Olaf Scholz called his stimulus package to protect businesses – including an unlimited amount of bank-channelled loans from state development bank KfW – a bazooka. One senior Italian bank executive complained to Euromoney at the end of March that Italy’s programme was, by comparison, an air rifle.
In normal times it would be more understandable for the European Commission and Scholz’s Italian counterpart, Roberto Gualtieri, to worry about Italy incurring even more debt. But, in this extraordinary period, Italy’s caution only emphasized its risk of economic collapse.
“The Italian government needs a mental revolution to progress,” says the Italian banker.
In fact, Italian businesses need more support than those in northern Europe, and not just because its economy has already been ravaged by years of European Union-imposed austerity. Covid-19 has hit its northern economic heartland particularly badly, and its lockdowns came hard and early. Its businesses are generally smaller and its economy is more reliant on tourism.
The situation quickly became desperate. Banks are cooperating with the government to give advances on the new unemployment benefits. But that’s harder to do in southern Italy, as the informal sector is large.
And as small businesses and their owners also have lower cash buffers in the south, bank branches there have had people begging them for money just to buy food.
Finally, on April 6 – almost a month after the rest of Europe had announced similar packages – Gualtieri announced guarantees of up to 90% on €400 billion of new credits through Sace, the export arm of state development bank CDP.
Firms of all sizes can access Sace-guaranteed loans for up to 25% of their annual turnover, with another €200 billion available in the form of co-insured exports.
At the same time, Gualtieri radically strengthened a €100 billion guarantee scheme for new and forborne loans to small and medium-sized enterprises and professionals through state lender Mediocredito Centrale.
This scheme came under the first so-called ‘Cura Italia’ decree in mid March – initially only guaranteeing 30% of the risk, with banks taking the first loss.
Under the second decree, dubbed ‘Restore liquidity’, the Mediocredito guarantee rose to 90% and to 100% on loans of up to €24,000 (by contrast KfW’s 100% guarantee goes up to €800,000).
The demand for these loans is clear.
One company Euromoney speaks to in north-central Italy, Encaplast, makes retail and medical packaging. Demand for its products has rocketed since the coronavirus outbreak.
Even so, it’s applying for the full €4 million it can get from Sace because many of its clients have delayed payments and because it is worried about the local banking sector.
Companies that were in a good shape before the crisis will be able to get financing and enough cash to face their financial needs, even in a distressed scenario- Luca Manzoni, Banco BPM
Across Italy, banks have rolled out loan- repayment holidays, as this was the central element of the Cura Italia decree: debt moratoria for those hard-hit by the coronavirus; 18 months for households and six months for SMEs.
It was a natural first step because the institutional architecture existed: the state had helped banks enact similar holidays before, after crises such as earthquakes and the Genoa bridge collapse.
Yet this early emphasis on moratoria, which is worth €220 billion according to the government, coupled with demands from the banks for more flexibility on reporting bad loans, has resurrected old worries about the transparency of Italian banks’ loan values at a time when they are certain to see a big deterioration in their asset quality.
Before the coronavirus crisis, Italian banks were two thirds of the way through a five-year effort to cut non-performing loans, which had reached more than €300 billion in the middle part of the last decade.
By the end of last year, gross NPLs had fallen to about €100 billion, still about 8% of the system total.
Stefano Visalli, founder of SME-focused private equity fund Oxy Capital, told Euromoney in early March that “no one will pay a penny to the banks.”
Indeed, by early April, official figures showed 600,000 moratoria inquiries from businesses and households, affecting €75 billion of loans. All Encaplast’s lenders, for example, have agreed to a six-month stop.
The debt moratorium has turned out to be something of a distraction, as a week after Italy announced it, other states – often in addition to similar debt repayment holidays – announced much bigger and stronger guarantees for new loans.
Those new loans, after all, can be used to repackage or pay off existing debt, as well as to replace lost revenues.
Including the new Mediocredito and Sace schemes, Italy now puts its overall bank liquidity programme at €750 billion.
Italy's finance minister Roberto Gualtieri
Gualtieri has copied the term bazooka to describe it and come in line with peers by scrapping his previous reference to the much smaller amount the state actually expected to pay in loan losses.
“Companies that were in a good shape before the crisis will be able to get financing and enough cash to face their financial needs, even in a distressed scenario,” says Luca Manzoni, chief corporate officer of Banco BPM, Italy’s third biggest bank.
The country has not gone as far as Germany in setting up a fund to recapitalize bigger firms – perhaps a sign Italy is less at ease than Germany with the idea of propping up companies.
Manzoni says that in the longer term “equity will be key”, as Italy’s private wealth fills the gap its public-sector weakness leaves.
“There will be M&A driven by private equity, family offices and entrepreneurs,” he says.
With all these delays and with Italy’s programme in some areas still falling short of its neighbours, it is no wonder that its biggest banks are doing more than their European peers to show that they can go beyond the government’s shortcomings.
Two weeks before the Restore liquidity decree, UniCredit said it would go beyond Cura Italia by providing SMEs with additional finance of at least 10% of their outstanding debt.
For bigger companies it said it would suspend payments on the principal for up to a year on medium-term loans and extend credit lines for imports by up to six months.
Before this, Intesa Sanpaolo announced €15 billion of liquidity support for SMEs: €10 billion of project-contingent loans that could now be used for general purposes and €5 billion of additional 18-month financing, including €1 billion to tourism.
It had disbursed €1.5 billion of the €5 billion by the beginning of April.
Even in the depths of the crisis, tensions at the top of Italian banking have arisen: particularly after UniCredit chief executive Jean Pierre Mustier, president of the European Banking Federation, supported the European Central Bank’s request that banks postpone dividends and buybacks until October.
Intesa Sanpaolo’s chief executive Carlo Messina was not happy about this, not least because its biggest shareholders are Italian charitable foundations. After suspending its dividend, UniCredit offered its shareholder foundations interest-free loans up to the amount of the planned 2019 dividend.
ECB’s chief banking supervisor Andrea Enria justified the suspension of dividends partly on the grounds of corporate social responsibility, a statement likely to make Messina bristle if it suggested that Intesa is neglecting its social obligations. Its direct financial contribution to the health response has dwarfed what UniCredit has done (about €3 million, mainly through the UniCredit foundation, by mid April).
In early March, mainly at Messina’s instigation, Intesa Sanpaolo donated €100 million to the government department coordinating the response to the public health crisis. By mid April, €80 million had been allocated, including more than €50 million for medical and personal protective equipment and more than €25 million to hospitals in Italy’s four biggest cities.
“This emergency requires extraordinary measures, which is why we made our donation,” Messina told a local newspaper on March 6.
The EU, he quickly added, should follow suit.