Another decree was approved yesterday to provide liquidity and protect Italian firms during the emergency period. More is expected to come in support of households.

The decree approved yesterday by the Italian government is mostly devoted to businesses and extends the scope of Decree Cura Italia on tax payment deferrals and loan guarantees while adding some new measures. As the text has not yet been published we base our observations on the Government’s press release.

Guarantees beefed up for all firms

The decree foresees SACE, the state-owned provider of guarantees for the exports part of the CDP group, to provide banks with some €200bn of guarantees on their new loans to enterprises. The guarantee will vary between 70% and 90% of loans and will have conditions attached, including the prohibition for the taker of the loan to pay dividends over the next 12 months and the obligation to use the funding to support Italy-based activities. The amount of the guarantee is capped at 25% of the turnover of the borrower in 2019 or twice the borrower’s labor cost. Some €30bn of the SACE guarantees will be reserved to SMEs having exhausted their capacity in their dedicated guarantee fund (Fondo Centrale di Garanzia). The decree also beefs up the Fondo Centrale di Garanzia to support firms with up to 499 employees and freelancers and reduces the red tape needed to tap guarantees. In parallel, the decree strengthens the support to Italian exporters by introducing a co-insurance system between the State and SACE, which is said to free up another €200bn of resources.

State protection from hostile takeovers extended

In order to shelter Italian businesses from the risk that extremely stretched valuations might open the door to hostile takeovers, the decree extends the scope of application of the golden power rule (the vetoing power of the government to stop hostile takeovers of Italian firms by foreign firms) to sectors strategically relevant under the European Regulation 45/2019. The rule will also apply to intra-EU deals until 31 December 2020.

More measures to follow to refinance and reinforce help to households

The rationale of the measures approved is to provide the widest possible spectrum of Italian firms with a liquidity lifeline enabling to bridge the emergency period of the COVID-19 epidemic in the attempt to avoid a liquidity crisis that could rapidly turn into a solvency one. Other measures are expected to follow soon, aimed at refinancing domestic short-work schemes and in direct support to households and independent workers. As developments in the epidemic and the final economic impact remain intrinsically uncertain, we still believe that the more locally funded measures may be down the road. In the lack of the text of the decree and of the accompanying technical report, we are not in the position to evaluate the budgetary impact of the measures just introduced. We deem this as part of the expected April decree, and the total package was tipped at €25bn.

Weathering the shock, but not preventing a steep GDP contraction in 2020

The set of measures put in place so far by the Italian government are qualitatively consistent with what is being done elsewhere in Europe. They are timely and rightly targeted, in our view, but can only help weather the economic shock coming from a nasty combination of lockdown-originated supply disruptions and a steep fall in demand. In the scenarios we recently published, our base case assumes that lockdown measures will be progressively loosened starting in early May. Based on the recent epidemics evolution in Italy, this seems a tentatively reasonable assumption, which entails for Italy a 6.8% GDP contraction in 2020, followed by a 3.3% recovery in 2021. This would bring about an inevitable deterioration of Italy’s budget deficit to some 7% of GDP, pushing the debt/GDP ratio up to 151% in 2020. The Italian Treasury is already accommodating for this, with accelerated debt issuance, with a short-term bias. The ultimate need for extra market funding will also crucially depend on the scale of the vehicles that Europe will agree to deploy over the next few months.