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Tomorrow tomorrow

23 May 2012 By Neil Unmack

Rome is in a bind. Arrears to local companies are choking the economy, but funding them upfront could push up the country’s debt and spook markets. So Italy is using banks to front some of the money in a way that avoids pushing up its debt at least for the time being.

Rome’s unpaid bills by local authorities and other government entities to private suppliers are estimated at about 70 billion euros, or 4 percent of GDP. Euro zone accounting rules allow governments to exclude commercial arrears from their public debt levels until they are paid. But accumulating arrears hurts the economy, and a European directive next year will force governments to recognise unpaid bills. Spain has started to bite the bullet; it recently recognised 35 billion euros of arrears owed by its regions as debt, and is taking out a loan to pay them off.

Italy has just announced a plan to clear up to 30 billion euros of arrears by year end – but in a way that won’t affect its reported debt levels. Some of the arrears will be netted off against unpaid taxes that the suppliers owe. A further 6 billion euros was set aside to clear arrears in last year’s austerity package.

To handle the remaining chunk, Rome has come up with an elaborate piece of financial engineering. Italian banks will lend to suppliers once they have obtained a certification to prove that the payments are legitimate. The loans leave the bank exposed to credit risk. But a separate central government-backed fund will provide banks with guarantees. Those, in turn, will cut the risk weighting on the loans so enabling banks to offer suppliers better terms. As these guarantees are contingent liabilities, they too should stay off the government’s balance sheet unless called on.

This jiggery-pokery is a stop-gap solution. At some point the government will still need to pay the bills. And going through the banks may be less speedy than the government just paying the supplier directly. Still, with debt equivalent to 120 percent of GDP and markets febrile from the Greek crisis, it easy to see why Rome prefers keeping things off-balance sheet.

 

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