Francesco Zecchini, Giuseppe Fonte, Valentina Za

MILAN (Reuters – Gianni Polodori made one last espresso at his newly renovated café in Ancona, Italy. Bar Dolce E Amaro has been on his mind since March. He wants to be able to repay months of rent, as well as the 10,000 Euro ($10519) bank loan.

Dolce e Amaro, or bittersweet, indeed.

When European governments tried to provide loans for companies in crisis, the debt provided a vital lifeline. It’s now a burden that Polidori, and other small businesses cannot bear. The conflict in Ukraine has accelerated energy costs and made it more difficult to make a living.

The situation is most acute in Italy, which underwrote 277 billion euros ($292 billion) in COVID-related corporate debt, significantly more than other European countries, and whose manufacturing-reliant economy is heavily exposed to skyrocketing oil and gas prices.

The first time capital repayments start in June will be a test for many of the 2,7 million Italian small- and medium-sized businesses (SME), that have taken on state-guaranteed Italian debt.

Italy seeks a solution that involves AMCO, a state-owned bad lender specialist. This will avoid an avalanche of business closures and forced sale of companies.

According to four sources, Rome is currently discussing a plan that would have AMCO supervise the purchase of SME loan from lenders. This proposal requires that the sale take place before banks can tap into the state guarantees. It also kickstarts a process which could push firms to the edge of bankruptcy if they cannot pay.

AMCO will instead handle the loans to help companies get on their feet again, according to the people.

Brussels must ensure that the scheme is not in violation of competition laws by permitting banks to transfer loans to AMCO at favourable terms. This could be above and beyond market prices. According to two people familiar with the negotiations, discussions have been delayed and there is no sign of a resolution.

The spokesperson of the European Commission explained that they cannot foresee the outcomes or timings of the contacts.

Rome already has more than 50 Billion Euros ($53 Billion) in reserve to protect against potential losses from corporate debt. This means that its budget deficit targets do not face any risk of rising defaults.

Policymakers must consider the political consequences of a wave business closings, especially with next spring’s general election.

Antonio Misiani of the economic head for the center-left Democratic Party said that “the state must find a solution to firms who received guaranteed loans during this pandemic but now face difficulties in paying their bills as high energy prices threaten them business.”

WAR MODIFIES THE PICTURE

Italy was once the European epicenter of pandemics. Its stocks of COVID-19 state-backed corporate loans were almost twice as large as those of France and Spain. They are nearly five times larger than the German 57 billion euro underwritten by Germany.

Depending on which type of loan you have, the government will cover between 80 and 90 percent of your debts. If the borrower defaults, the banks will take over the remainder.

Although the details of Italy’s repayment schedule aren’t public, one source with knowledge said that the capital payments for some 20 million euros worth of state-guaranteed debts would be due in the next month.

According to Euler Hermes, debt payment holidays and government-guaranteed funding helped Italian insolvencies fall to a low of 7,160 for 2020 (a 12 year low), before rebounding by 19% in 2021. This year, the Allianz-owned commercial finance insurer saw an 8.8% rise and then a 15.5% increase to 10,500 by 2023.

The outlook for corporate bankruptcy was not that concerning until just a few months back, but war has altered the situation. Although new guarantees have been provided, there aren’t any frameworks in place to handle the current ones,” an Italian government official declined to identify himself.

Brussels temporarily relaxed EU aid rules in response to the Ukraine conflict. Italy approved Monday state guarantees for bank debts for the second quarter of 2022, which were reserved for 26 industries that have been severely affected by war like ceramics and glass.

SACE (credit exports agency) has received a credit extension allowing them to renegotiate 34 billion Euros in COVID loans that it had granted large businesses, increasing their maturity time to at least 20 years.

Italian lenders wish to see a similar program for SME loan guarantees. The loans amount to around 243 Billion Euros, and were guarantee by MCC (state-owned lender).

According to a source familiar with the subject, banks want MCC, just like SACE to be able to extend them by renegotiating and providing a guarantee from the state at market prices.

It’s in direct contradiction with Rome’s proposal. This would mean that banks would need to fund the loan and then agree to terms with AMCO to transfer it to the AMCO-run vehicle.

Rony Hamaui from Milan’s Cattolica University said, “Italian Banks see an extension in the maturity state-guaranteed Loans as the Best Solution.”

Polidori will lose his cafe, despite the agreement reached between Rome and Brussels.

“I’ve worked 13 hour days since my business partner quit during COVID. However, lately it was hard to make rent. Food prices and electricity are out of control. He said that brioches are being sold at 16% more in my bakery.

“If I am able to sell I can try to repay my debts and settle my bills. The state will come after me, even though I have only paid interest so far.

($1 = 0.9485 euros)