Slow State Payments, a Serious Issue for Italian Firms

Dal-governo-quattro-decreti-per-pagare-le-imprese(WSJ – M.Mesco) Italy‘s departing government said Thursday that the state would pay €40 billion ($51.7 billion) in arrears owed to private-sector suppliers after the European Commission allowed Rome to relax its budget-deficit targets.

While the move will push Italy’s budget deficit wider, it could offer breathing room to Italian companies that are struggling with a protracted downturn and a serious credit crunch.

Italy’s local and central governments owe as much as €100 billion in arrears to the private sector and take an average of 180 days to pay their suppliers, with some companies still awaiting payments on 2008 bills, according to credit-management services company Intrum Justitia. However, there is little consensus as to the exact number, which the Bank of Italy estimates at around €70 billion. While the problem of state arrears is afflicting much of Southern Europe, Italy is the worst laggard in payments. Germany’s public administration pays in 36 days on average, while Spain and France pay in 160 and 65 days, respectively, Intrum Justitia says.

The state arrears are compounding a situation that is already difficult for Italian companies. With bank lending down sharply, businesses are struggling with a painful credit crunch. The state arrears, a protracted economic crisis and the credit crunch have together driven a wave of business failures. About 104,000 Italian companies went out of business last year, a record high, according to data provider Cerved.

Italy’s political paralysis—the country remains without a government a month after national elections—has complicated the task of searching for a solution. On Thursday, the government said that arrears for €20 billion will be paid in the second half of 2013 and another €20 billion in 2014.

The government led by departing Premier Mario Monti was able to propose the fresh spending only after the European Commission ruled it would allow one-time charges that would push Italy’s deficit above EU limits. If Parliament approves the plan, Italy’s budget deficit will be 2.9% of gross domestic product this year, compared with the previous forecast of 1.6% given in September, Economy Minister Vittorio Grilli said Thursday at a news conference. Without the arrears payment, it would be 2.4% of GDP, Mr. Grilli said.

However, Mr. Grilli provided no details Thursday on where the state would find the money to cover the outlay. One option could be a one-time bond, according to a person familiar with the ministry’s proposals. Alternatively, the government could extend credits to banks that would repay the debt, according to this person.

In either case, the payment will push Italy’s budget deficits higher. “It will ease the situation only temporarily,” says Emanuele Padovani, a professor of business management at the University of Bologna. “It would be much more effective to cut down public spending.

Moreover, the move doesn’t resolve the problem of chronic delays in state payments. Indeed, Italy adopted a European directive in January imposing a 30-day deadline for most state payments. But companies report little improvement. “We’re happy if we get money in four to six months,” said Massimiliano Lembo, deputy head of Illia, which supplies intelligence services to the Italian justice ministry. “Thirty days is absolutely out of the question.”

Business lobby Confindustria reckons that repayment of around €48 billion of arrears would create 250,000 jobs and boost Italy’s GDP by one percentage point for each of the next three years. (The government expects the economy to shrink 1.3% this year and grow 1.3% next year.)

Repayment of the arrears “could do much more for the Italian economy in the near term than anything the European Central Bank could do,” according to J.P. Morgan analyst David Mackie.

Achille Saletti, founder of Saman, a group that provides drug-rehabilitation services, garners more than half of his revenue from state contracts. He has been waiting for some payments dating back to 2008 and says the nonprofit group is now struggling. “We’ll keep going as long as we can,” he said. “When the money runs out, we’ll close.”

Other European countries have been moving more quickly to tackle the problem. Using funds from an international bailout, Greece will have repaid €3.7 billion of a total €8 billion owed to the private sector by month’s end. Spain guaranteed nearly €30 billion of credit lines with Spanish banks and the government’s national lending institute to pay back part of its arrears. France is working towards shortening payment of its bills to 20 days by 2017.


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