By Valentina Za, Giuseppe Fonte and Francesco Zecchini
MILAN (Reuters) – Gianni Polidori served a final espresso at his freshly refurbished cafe in the Italian port of Ancona in late March. Since then, he has been trying to sell Bar Dolce e Amaro so he can pay off months of rent and a bank loan of 10,000 euros ($10,519).
Dolce e Amaro, or bittersweet, indeed.
Debt was a lifeline during the COVID-19 pandemic when European governments rushed to secure loans to keep businesses afloat. It’s now a burden Polidori and other small businesses can’t afford, as the conflict in Ukraine inflates energy bills and food costs, making it harder to earn a living.
The situation is most dire in Italy, which has taken on 277 billion euros ($292 billion) of COVID-related corporate debt, far more than other European countries, and whose manufacturing-dependent economy is highly exposed to soaring oil and gas prices.
Some of Italy’s 2.7 million small and medium-sized enterprises (SMEs) that have taken on state-guaranteed debt, including Polidori, face the first test of their ability to service their debts when capital repayments begin in June.
To avert a wave of business closures and forced sales, Italy is seeking a workaround involving state-owned bad debt specialist AMCO.
Rome has discussed a plan with European Union authorities that would see AMCO oversee the purchase of SME loans from lenders, four people told Reuters. The proposal would require the sale to take place before banks dip into the underlying state guarantees and start a process that could tip companies to the brink if they are unable to pay.
AMCO would instead manage the loans with a view to helping businesses get back on their feet, the people said.
Brussels, however, must ensure the scheme does not breach competition rules by allowing banks to offload loans to AMCO on favorable terms, potentially above market prices. Talks have taken longer than expected and a conclusion is not yet in sight, two sources familiar with the talks said.
“We cannot prejudge the timing or the outcome of these contacts,” said a spokesperson for the European Commission.
Rome has already set aside more than 50 billion euros ($53 billion) to cover potential losses on the corporate debt it has guaranteed, meaning its budget deficit targets are not threatened by a increase in payment defaults.
But the potential political fallout from a wave of business closures is on the minds of policymakers, especially with a general election slated for next spring.
“The state must find a solution for companies that received guaranteed loans during the pandemic and are now struggling to meet payments as energy prices threaten their businesses,” Antonio Misiani told Reuters. , economic leader of the center-left co-ruling Democratic Party. .
WAR CHANGES THE IMAGE
Once the European epicenter of the pandemic, the stock of state-guaranteed COVID-19 business loans in Italy is almost double that of France and Spain, and nearly five times larger than the 57 billion euros subscribed by Germany, the largest economy in the region.
Depending on the type of loan, government guarantees in most European countries cover between 80% and 90% of debt, with banks having to bear the residual loss if borrowers falter.
Details on the repayment schedule in Italy are not public, but a person with knowledge of the matter said principal payments on some €20bn of state-guaranteed debt were due next month.
Debt payment holidays and state-guaranteed financing helped Italian insolvencies fall to a 12-year low of 7,160 in 2020 before rebounding 19% in 2021, according to Euler Hermes. The Allianz-owned trade credit insurer is seeing an 8% increase this year, followed by another 15% increase to 10,500 in 2023.
“The outlook for business failures was not as worrisome as it was a few months ago, but the war has changed that. New safeguards are being provided but there is still no framework to deal with the existing ones “said an Italian government official. , who declined to be named, said.
Brussels has already temporarily relaxed EU state aid rules to counter the disruption caused by the conflict in Ukraine and Italy on Monday approved state guarantees on bank debt for the second half of 2022 reserved for 26 sectors hard hit by the war such as ceramics, glass and paper. .
It also gave the export credit agency SACE a way to renegotiate some 34 billion euros in COVID loans it issued to big companies, extending their maturity for up to 20 years.
Italian lenders would like to have a similar measure for loans to SMEs, which amount to around 243 billion euros and are guaranteed by the public lender MCC.
The banks want the MCC to also be able, like SACE, to extend them by renegotiating them and offering a state guarantee at market prices, explained a person familiar with the matter.
This is at odds with Rome’s proposal, which banks are wary of because it would require them to provide financing and agree with AMCO on terms on which they would transfer loans to an AMCO-managed vehicle.
“Italian banks see extending the duration of state-guaranteed loans as the best solution,” said Rony Hamaui, professor of economics at Cattolica University in Milan.
Whatever is agreed between Brussels and Rome, it will be too late for Polidori, the café owner.
“Since my business partner left during COVID, I’ve been working 13 hour days, but lately I just haven’t been earning enough to pay the rent. Electricity is out of control, and so are food prices. My bakery charges an extra 16% for buns,” he says.
“If I manage to sell, I can try to pay my bills and repay the state. So far, I have only had to pay interest on this loan, but the state is obliged to pursue me at a given time.”
($1 = 0.9485 euros)
(Additional reporting by Jesus Aguado in Madrid; Editing by Carmel Crimmins)