Italy is haunted by the pain of past economic crises

TREVISO, Italy – On the plains of Italy’s Veneto region, in a small town about 20 miles north of Venice, Antonio Carpenedo developed unusual methods of making cheese. At La Casearia Carpenedo, wheels of cheese are soaked and aged in wine – red, white and Prosecco – while others are covered in hay and aged in barrels.

Mr. Carpenedo built this “drunken cheese” business from the debris of a financial disaster. In the 1980s, rising interest rates wiped out his former cheese-making business. “They bled us dry,” he said, recalling rates of 27%. The business had to be sold and he started over.

Today, fear of another financial disaster triggered by rising interest rates and economic uncertainty haunts his sons, who run the business, and has crippled their investment plans.

“Rates are going up, and we don’t know what’s going to happen,” said one of the sons, Ernesto Carpenedo. “If we hit the rates we had in the 80s, it’s devastating and you basically kill the business.”

Over the past decade, interest rates in the 19 countries that use the euro have reached historic lows, and the European Central Bank has designed programs to encourage banks to lend generously to businesses. Now, with inflation soaring across the bloc, the central bank is changing tack and tightening funding conditions ahead of the European Central Bank’s first interest rate hike in 11 years, which is expected to take place on Thursday.

This change is being felt hard in Italy, the euro zone’s third-largest economy and a frequent source of political and economic headaches for the region. The withdrawal of easy money by the central bank in recent months has reignited investor unease over Italy’s high level of debt and its commitment to economic reform.

Last month, government debt yields, a measure of a country’s borrowing costs that also serves as a benchmark for other lending, rose sharply. At around 150% of gross domestic product, Italy’s debt burden is the second highest in the eurozone.

Italy “is systemically important to the monetary union because of its size,” said Sarah Carlson, senior analyst for Italy’s sovereign rating at Moody’s.

The increase in borrowing costs is is starting to become a concern across the continent. The European Central Bank has acted later than many of its international counterparts to tackle inflation, citing the fact that most price pressures have been “imported” as a result of global supply chain disruptions and rising energy prices exacerbated by the war in Ukraine. Today, amid signs that strong price increases are likely to take root in the economy, policymakers were spurred into action.

Businesses in Italy are accustomed to long periods of lackluster economic growth and political upheaval. What is new is the sudden surge in inflation and the end of ultra-low interest rates.

Since the introduction of the euro just over 20 years ago, inflation and interest rates have been low, making it easy to find the resources needed to grow, said Livio Libralesso, managing director from Geox, the footwear brand founded in 1995 in Montebelluna. The city has become a hub of shoe production in the Veneto region.

Businesses no longer had to struggle with lira devaluations or sharp fluctuations in the value of the currency with neighboring countries, and Geox could focus on innovation. It was “a kind of paradise,” he says.

The weakness of the euro was accentuated by fears that Europe could slide into recession due to disruptions in energy supplies. But the outlook for Italy is particularly difficult. The European Commission predicts that Italy will experience the slowest economic growth in the bloc next year, at just 0.9%, due to a decline in consumer spending as households reduce spending and lower business investment due to weaker demand and rising cost of borrowing.

There is a risk that Italy’s outlook will deteriorate further due to the country’s dependence on Russian energy. Before Russia invaded Ukraine, Italy got 40% of its gas supply imported from Russia; which has been reduced to about 25 percent.

Last week, with little warning, an era of political stability and economic reform was threatened: Prime Minister Mario Draghi’s technocrat-led coalition government appeared to be on the verge of collapse after just 17 months, when Mr. Draghi tried to resign amid political stalemates.

“You can always trust Italian politics to throw a curveball,” said Eurasia Group analyst Federico Santi. He raised questions about whether a new government would go ahead with the reforms needed to receive the European Union’s pandemic relief funds, worth around 200 billion euros. The Italian parliament votes this week on the future of the government.

The Veneto region is an industrial area and famous for its Prosecco, but its resilience to economic downturns and political upheaval will be tested by the darkening outlook for the global economy.

In recent years, the Carraro Group, which manufactures and exports spare parts for tractors, has steadily continued its recovery from the 2008 financial crisis, taking advantage of low interest rates to sell bonds in order to restructure its debt and then invest . This year the company, outside of Padua, planned to refinance part of its debt by borrowing 120 million euros, expecting to obtain better terms than the 3.5% it paid on its previous bonds.

But at 8:30 a.m. on the day Padua executives opened the order book, they had to close it. It was February 24 and Russia had just invaded Ukraine. From now on, the company’s refinancing plan is suspended.

Yet the most pressing issue for the Carraro Group is the rising costs of running its business. Rising gas and electricity charges would have cost the company an extra €10.5 million this year had it not been able to use its financial trading service in Luxembourg to hedge against rising costs. price. Instead, the energy will cost Carraro an extra €5m.

“The moment is very difficult and very complicated,” said Enrico Carraro, the company’s president. “There are all the ingredients right now to have a big and deep crisis. Maybe the heart of the storm won’t hit as hard, but we have to be prepared. »

For smaller businesses, there are fewer ways to hedge against rising costs. About 20km north of Carraro’s headquarters in Castello di Godego, Stocco, a metal furniture maker, has seen the cost of the iron it needs more than double since October.

CNA Treviso, an association of small and medium-sized businesses in the region that also helps companies obtain low-interest credit, estimates that companies are experiencing cost inflation of between 15 and 25%. Most of this is due to high energy loads.

With so much uncertainty about the future of energy and commodity prices, it is a challenge for companies that have limited pricing flexibility to know what to do next. Gianpaolo Stocco, co-owner of the furniture company, said business customers were waiting for Stocco’s prices for next year’s catalogs.

Prices could continue to rise, but “if I use the current price, I could also be out of the market in 2023 if it goes down again,” Stocco said.

Inflation in Italy is 8.5%, but Stocco expects inflation at his company to continue to be even higher next year.

He tells customers that Stocco’s prices will increase by 10%.

Expectations of such high inflation are bad for the central bank. The future path of inflation has a psychological component; higher prices can become self-fulfilling if firms and households expect them and set higher prices and demand higher wages in response.

Economists don’t expect interest rates to rise in Europe to 1980s levels, when double-digit rates were the norm, as recession forecasts widen and narrow window for rate hikes . But the combination of high energy prices, high inflation and slow economic growth has created enormous uncertainty for companies that cannot predict when supply chain disruptions will ease.

Casearia Carpenedo, the cheese factory, expanded and invested rapidly during the period of low interest rates, borrowing to fit rooftops with solar panels and building machinery to clean barrels. Over the past decade, he has spent over half a million euros on investments. Now further investment has been put on hold, ending the family’s hopes of opening a school to train new cheese makers, buying land to grow their own grapes and creating an herb garden.

These challenges overlap with the existential questions companies often ask about the future of their industry.

At La Casearia Carpenedo you have two options: return to a small artisanal producer or move to a large international company? “That’s the question we are evaluating,” said Ernesto Carpenedo. But “it is not easy today to understand what will happen tomorrow”.

Elizabeth Povoledo contributed reporting from Rome.

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