Italy offers banks a $15.5 billion lifeline
A caveat: More credit must go to small firms. Obama is also pushing aid to small businesses.
In an effort to fight the credit crunch, the Italian government recently approved a $15.5 billion plan targeted at helping both small firms and banks.
Under terms of the plan approved last month, the government is vowing to buy special security bonds issued by banks in order to provide them with greater liquidity. In return, the banks must subscribe to a "code of ethics" and guarantee that they will grant more loans to companies with fewer than 250 employees – the same firms that have been the bedrock of Italy's economy.
A similar effort to protect small businesses in the US was expected to be announced Monday by President Obama. Much of the US government's plans to counter the recession have focused on helping massive banks and corporations, but small businesses have accounted for 70 percent of new job growth in the US over the past decade, according to the Obama administration.
The US plan calls for offering $375 million from the massive economic stimulus fund to make it easier for small businesses to obtain credit. "We know that small businesses are the engine of growth in the economy, and we absolutely want to do things to help them," Christina Romer, the head of Obama's Council of Economic Advisers, said on NBC's "Meet the Press" Sunday.
Italy is already moving forward with its plan to free up capital for banks to lend to small businesses. Nicknamed "Tremonti's bond" after the minister of finance Giulio Tremonti, the securities now being offered will have an annual yield of between 7.5 and 8.5 percent.
"The idea is to make sure that the money lent to banks will actually be redistributed to the real economy," says Andrea Colli, an economist at Bocconi University in Milan. "It's quite an innovative plan."
One of Italy's largest banks, Banco Popolare, announced last week it would take up the government's offer and accept $1.8 billion in assistance in the form of the bonds. It was the first of the country's banks to tap into the plan.
The bonds are just one of the capital-boosting measures being initiated by European Union countries. In late 2008, the German government injected €8.2 billion ($10.6 billion) in cash aid to Commerzbank, the country's second-largest bank, followed by $19.3 billion in debt guarantees. The Belgian government also gave several billion to shore up the country's major banks.
Those measures, however, were mostly aimed at helping banks that had invested in so-called toxic assets. With the notable exception of Unicredit, whose stability is endangered by investments in Eastern Europe, Italian banks have been less exposed to the credit crunch because of their relatively conservative business approaches, analysts say.
Offering Italy's banks a stimulus lifeline is a wise idea, says Mr. Colli, especially with the condition that the banks must free up additional credit for small firms. "Giving banks money and letting them keep it would be simply useless."
Although Italy might be better known abroad for huge fashion houses, Europe's fourth-largest economy heavily relies on small, family-owned firms in highly specialized sectors, such as precision machinery, electrical goods, chemicals, pharmaceuticals, and motors. Once strong and successful, those small firms are now in bad shape, says Franco Amatori, a professor of economic history at Bocconi: "While the world economy went global and large multinationals became dominant, Italy has simply lost the train. Here, big business doesn't exist, outside the utilities sector."
In times of crisis, a system based on small firms can be beneficial: Italy's small firms have a tradition of self-financing, says Colli, and are thus less directly affected by the credit crunch.
On the other hand, small firms are less likely to ensure their contractual rights are respected, which can be especially harmful during times of worldwide crisis. "It's like playing in a minor league team while the rest of the world is in the NBA," explains Mr. Amatori. "That's why now they are in bad need of financial policies specifically aimed at them." The professor says he is skeptical, though, about the way to ensure banks will respect their obligations.
Highly specialized technology firms, which tend to do business mostly with large corporations, are now particularly exposed. Bruno Silani, an entrepreneur who produces components for airport traffic control, argues that small firms' major problem with liquidity does not lie in banks holding back loans, but rather in the difficulty of obtaining payments from large customers.
Like many of others operating in highly specialized sectors, Mr. Silani says that despite the crisis he doesn't lack customers. "The problem is that they keep delaying the payments – sometimes I have to wait 18 months."
This leaves businesses like his in a bind. "When your clients are so big and you're so small, you cannot raise your voice."
Silani says in the past years it has become a common practice among small entrepreneurs to turn to banks for loans when delayed payments are expected. Banks were once willing to offer credit to bridge the payment gaps, "but now they are increasingly reluctant to do so," he says.
"I'm really glad the government is pressuring banks to give more loans to small firms," Silani says. "But they should do more to guarantee we are in the position to have contracts respected."