Anti-crisis measures: have they contained the riskiness of corporate credit in Italy?
On November 10, the EU Commission approved €4.5bn in state aid to support Italian businesses, but uncertainty persists over their ability to stand on their own feet once pandemic support schemes are unwound, according to Alessandra Bettocchi and Rita Romeo of Prometeia
The pandemic crisis has severely hit the Italian economy, with serious economic fallout for companies. While the recovery has been faster in the industrial sector, which in the second quarter of this year was already close to pre-pandemic levels, the service industry has been markedly affected by fears of contagion and restrictive measures.
The build-up of new impaired loans has been contained by the unprecedented measures taken by the government and the initiatives promoted by banks and associations since the beginning of the outbreak. In particular, the wide use of credit support measures, i.e. credit moratoria and loans backed by public guarantees, gave companies experiencing temporary difficulties the possibility to overcome shortfalls in working capital.
More than year and half since the outbreak, the effects of the crisis on credit quality appear small and heterogeneous. In 2020, credit risk remained generally under control, with just 25 percent of the loans to non-financial corporations showing a higher default rate, mostly concentrated in sectors most exposed to the fallout of the pandemic (e.g., automotive, real estate, entertainment and travel, sports and the arts) (Fig. 1a). The credit quality continued to improve in the first half of 2021, when only 20 percent of the corporate loan portfolio showed an increase in the default rate, even if the number of sectors with higher default rates increased (Fig. 1b). In any case, the overall default rate is still lower than in 2020.
Fig. 1 Default rate of corporate credit (% value)
a) sectors that show a worsening of riskiness in 2020
b) sectors that show a worsening of riskiness in 2021 Q2
What evidence can we draw from guaranteed loans?
Since the beginning of 2020, the demand for loans with state guarantees increased significantly. In particular, the number of accepted applications by the Central Guarantee Fund during the period considered was more than two million, amounting to more than €180bn financed, showing a considerable increase compared to 2019 when 125 thousand applications were accepted for a total of around €19bn.
The companies that benefited from such financing are mainly micro and small and operate in industries such as, commerce, accommodation and food services. More than half of the loans went to businesses located in northern Italy and belong to a medium-low risk class (Fig. 2).
Fig. 2: Loans accepted by the Central Guarantee Fund
The sectoral distribution
The sectoral distribution of loans financed by the Fund as a percentage of bank credit non-financial corporations confirms that some of the sectors most exposed to the pandemic crisis, such as trade, accommodation, and catering, were those that used this measure the most.
In most cases, applying for such a supporting scheme was accompanied by the restructuring of existing loans; in some cases the operation involved more than a third of the credit to the sector (Fig. 3), thus improving the sustainability of credit for firms.
However, for some sectors, such as textiles and residual manufacturing activities, despite the extensive use of the Fund, riskiness has been increasing since the beginning of the year. These sectors represent risk areas on which banks will have to maintain a high level of attention through early warning systems and active management of deteriorating loans.
Fig. 3 Loans accepted by the Central Guarantee Fundby corporate sectors
% on total sector’s loan, 2020-2021H1
Have the measures taken mitigated the risk build-up?
The answer is yes, but the worst has yet to come. It is true that, unlike in the past, Italian companies are facing this crisis with a more solid capital position: even without the support measures, credit deterioration would have been lower than it was in previous crises.
However, there is still a high level of uncertainty on the ability of companies to stand on their own feet once all the support measures have ended, especially for those in sectors that have not yet overcome the impact of the pandemic.
For this reason, the government and other institutions are closely monitoring the impact of business support measures and considering whether it might be necessary to keep them in place. The extension of the SACE and Central Fund guarantees, envisaged in the 2022 Budget Law, even if re-modeled, will provide further oxygen to firms, plausibly contributing to contain the increase in credit impairment expected in 2022.
 SACE is an Italian Joint Stock Company 100 percent controlled by the Italian Ministry of Economy and Finance. At the end of 2012 SACE was acquired by Cassa Depositi e Prestiti, the Italian public-private investment bank, 70 percent owned by the Italian Ministry of Economy and Finance and 30 percent owned by 66 Italian banking foundations. It is specialised in providing export credit insurance, investment protection, sureties, and financial guarantees for buyers’ credit. In the last few years, SACE has primarily been supporting large-scale infrastructure projects, and operations in the energy, refinery, steel and petrochemical sectors.