Estudios Económicos
Italy

Italy

Population 60.5 millions
GDP 34,321 US$
B
Country risk assessment
A2
Business Climate
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Synthesis

major macro economic indicators

 

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 1.7 0.8 0.3 -11.9
Inflation (yearly average, %) 1.3 1.2 0.7 0.1
Budget balance (% GDP) -2.4 -2.1 -1.6 -12.3
Current account balance (% GDP) 2.6 2.5 2.9 3.0
Public debt (% GDP) 131.3 132.1 133.1 160.0

(e): Estimate. (f): Forecast.

STRENGTHS

  • Good quality competitiveness in some resilient sectors: agri-food and pharma
  • Export sectors regained competitiveness and strengthened
  • Bank and corporate balance sheets had improved in the years leading up to the pandemic
  • Very large emergency economic measures
  • Recent political instability seems to have improved under the pandemic

WEAKNESSES

  • High public debt will further deteriorate significantly this year
  • Highly dependent on tourism and exports to European partners (including the UK)
  • Large quota of small, low-productivity companies (more than 90% of firms have 10 employees or less)
  • Chronically deficient investment and zombie firms weigh on potential growth
  • Strong regional disparities, organized crime still influential in the South

Risk assessment

The pandemic strengthens the Conte government amid a deteriorating business climate

Italy is governed by a coalition government led by the centre-left Democratic Party (DP) and the populist-left 5-star movement (5SM). Originally a marriage of convenience set up in September 2019 to displace rising right-wing politician Matteo Salvini from power, the expected durability of the coalition has strengthened during the pandemic thanks to the rising popularity of PM Giuseppe Conte. Despite the intensity of the outbreak, both the economic and health responses of the government have been overall perceived as highly efficient, and Conte played an important role in leveraging support for the EUR 750 billion EU recovery fund deal. As such, the probability of a snap election over the next year has decreased. However, tensions within the coalition and within the 5SM remain a threat to the quality of governance, with implications for the business climate. 5SM is in decline, with a hemorrhage of parliamentary defections and the resignation of former party head Luigi Di Maio. To recover support, 5SM lawmakers tend to attack business interests. This has been the driving force behind the revocation of ArcelorMittal’s legal protections in the Taranto steel plant, as well as the dispute over Atlantia’s motorway concession, both of which have involved intense legal confrontations  between the state and investors.

 

The strongest contraction aside of World War II

With roughly 250,000 confirmed cases and 58 deaths per 100 000 inhabitants, Italy ranks as 7th deadliest Covid-19 outbreak in the world, as of mid-2020. As the first country to be hit by the pandemic outside of East Asia, Italy enacted a strict national lockdown from early March to early May, causing the cessation of all non-essential activity during the month of April and leading GDP to contract by a record 17,3% YoY in Q2. Health measures were progressively lifted throughout the summer, but given a rising trend in confirmed cases, authorities stand ready to dial back on the reopening. Performance in H2 2020 will depend on 3 factors: the strength of the rebound in Q3, whether there is a return to some form of lockdown in Q4 and the extent to which economic support measures will be renewed in the latter case. Assuming that activity peaks at 90-95% of 2019 levels during the summer (propelled by pent-up demand) and some tightening of containment measures in Q4, the economy is set for a contraction more than twice as strong as that of 2009. This places the Italian economy among the worst affected in the industrialized world, due to its high dependence on pandemic-sensitive sectors like tourism (13% of GDP), automotive (9%), construction (7%), transport (7%) and metals (5%). On the demand side, the government has implemented a large array of measures to support household incomes, including a temporary furlough scheme (covering, at its peak, an estimated 45% of the private sector workforce), a 600 euro monthly stipend for the self-employed and suspension of mortgage payments. While this is very effectively cushioning the blow to income, the rise in precautionary savings and eventual adjustment of unemployment (which has actually decreased so far) should yield a 10-12% contraction in consumption. Private investment, more sensitive to uncertainty, should contract by 15-18%. Demand for exports, mostly dependent on the rest of Europe, will contract by 11-14%, with some upside risks conditional on a better-than-expected German recovery. The only positive contribution to growth will come from emergency fiscal stimulus, worth around 4.7% of GDP.

 

Public debt set to rise to levels comparable to Greece circa 2012

Like in other advanced economies, the public sector has deployed extraordinary means to substitute private activity during the lockdown. This includes the aforementioned stimulus, but also EUR 15.3 billion in tax deferrals (corporate tax and social security contributions for small and vulnerable firms, VAT payments for April and May) and, especially, a set of grants and liquidity guarantee programs for firms accounting for 38% of GDP. Therefore, the pandemic will not only entail a historic budget deficit, but also a historic incurrence of contingent liabilities, of which an unknown part will become losses distributed between banks and the state in the coming years. As a result, the levels of public debt are set to reach record heights this year. However, the risks associated to this debt are being mitigated by the ECB’s quasi-open ended support through bond-buying programs (which keep debt service costs extremely low). Furthermore, Italy will be the main beneficiary (in absolute terms) of the EUR 750 billion EU recovery fund, of which it will receive EUR 209 billion (11.5% of GDP) over 7 years. Dominated by small firms with chronically low productivity, the corporate sector exhibits pockets of vulnerable debt in manufacturing (25% of vulnerable debt), construction (16%), real estate (15%) and retail (13%). While bank asset quality had been steadily improving since the twin crisis, bad loans are expected to proliferate again in the following years. As the contractions of internal and external demand should counterweight each other, the net effect of the pandemic on the current account will be mostly muted.

 

 

Last update : October 2020

Payment

Trade notes (cambiali) are available in the form of bills of exchange or promissory notes. Cambiali must be duly accepted by the drawee and stamped locally at 12/1000 of their value, being issued and payable in the country. When issued in the country and payable abroad, they are stamped at 9/1000, and finally stamped at 6/1000 in the country if stamped beforehand abroad, with a minimum value of €0.50. In case of default, they constitute de facto enforcement orders, as the courts automatically admit them as a writ of execution (ezecuzione forzata) against the debtor.

Signed bills of exchange are a reasonably secure means of payment, but are rarely used due to a high stamp duty, the somewhat lengthy cashing period, and the drawee’s fear of damage to his reputation caused by the recording and publication of contested unpaid bills at the Chambers of Commerce.

In addition to the date and place of issue, cheques established in amounts exceeding €1,000 and intended to circulate abroad must bear the endorsement non trasferibile (not transferable), as they can only be cashed by the beneficiary. To make the use of cheques more secure and efficient, any bank or postal cheque issued without authorisation or with insufficient funds will subject the cheque drawer to administrative penalties and listing by the CAI (Centrale d’Allarme Interbancaria), which automatically results in exclusion from the payment system for at least six months.

Bank vouchers (ricevuta bancaria) are not a means of payment, but merely a notice of bank domicile drawn up by creditors and submitted to their own bank for presentation to the debtor’s bank for the purposes of payment (the vouchers are also available in electronic form, in which case they are known as RI.BA elettronica).

Bank transfers are widely used (90% of payments from Italy), particularly SWIFT transfers, as they considerably reduce the length of the processing period. Bank transfers are a cheap and secure means of payment once the contracting parties have established mutual trust.

 

 

 

Debt collection

Amicable phase

Amicable collection is always preferable to legal action. Postal demands and telephone dunning are quite effective. On-site visits, which provide an opportunity to restore dialogue between supplier and customer with a view to reaching a settlement, can only be conducted once a specific licence has been granted.

Settlement negotiations focus on payment of the principal, plus any contractual default interest as may be provided for in writing and accepted by the buyer.

When an agreement is not reached, the rate applicable to commercial agreements is the six-monthly rate set by the Ministry of Economic Affairs and Finance by reference to the European Central Bank’s refinancing rate, raised by eight percentage points.

 

Legal proceedings

When creditors fail to reach an agreement with their debtors, the type of legal action taken depends on the type of documents justifying the claim.

 

Fast-track proceedings

Based on cambiali (bills of exchange, promissory notes) or cheques, creditors may proceed directly with forced execution, beginning with a demand for payment (atto di precetto) served by a bailiff, preliminary to attachment of the debtor’s moveable and immoveable property (barring receipt of actual payment within the allotted timeframe). The resulting auction proceeds are used to discharge outstanding claims.

Creditors can obtain an injunction to pay (decreto ingiuntivo) if they can produce, in addition to copies of invoices, written proof of the claim’s existence by whatever means or a notarized statement of account. A forty-day period is granted to the defendant to lodge an objection.

Ordinary summary proceedings (procedimento sommario di cognizione), introduced in 2009, are used for uncomplicated disputes which can be settled upon simple presentation of evidence. Sitting with a single judge, the court determines a hearing for appearance of the parties, and delivers a provisionally executory ruling if it acknowledges the merits of the claim; the debtor however has 30 days to lodge an appeal.

 

Ordinary proceedings

The creditor must file a claim with the court (citazione) and serve summons to the debtor, who will file a defence (comparsa di constituzione e risposta) within ninety days via a preliminary hearing. The parties then provide briefs and evidence to the court. When the debtor fails to bring a defence, the creditor is entitled to request a default judgment. The court will usually grant remedies in the form of declaratory judgments, constitutive judgments, specific performance and compensatory damages but it cannot award any damages which have not been requested by the parties.

Undisputed claims are typically settled within four months, but the timescale to obtain an enforceable court order depends on the court. Overall, disputed legal proceedings take up to three years on average.

The current civil procedure code is intended to speed up the pace of proceedings by reducing the procedural terms, imposing strict time limits on the parties for submitting evidence and making their cases, and introducing written depositions in addition to oral depositions.

 

Enforcement of a legal decision

A judgment becomes enforceable when all appeal venues have been exhausted. If the debtor fails to comply with a judgement, the court can order compulsory measures, such as an attachment of the debtor’s assets or allowing the payment of the debt to be obtained from a third party (garnishee order) – although obtaining payment of a debt via the latter option tends to be more cost-effective.

For foreign awards, decisions rendered from a country in the EU will benefit from special procedures such as the EU Payment Order or the European Enforcement Order. Judgment from a non-EU country will have to be recognized and enforced on a reciprocity basis, meaning that the issuing country must be part of a bilateral or multilateral agreement with Italy.

Insolvency proceedings

Out-of court proceedings

The 2012 legal reform allows a debtor to file an application for composition by anticipation. Negotiation on an agreement commences 60 to 120 days prior to the initiation of judicial debt restructuration proceedings. The debtor retains control over the company’s assets and activities. A new pre-agreed composition plan may be agreed with the approval of creditors representing 60% of the debtor company’s debt.

 

Restructuring proceedings

This settlement is a court procedure which allows a company in financial difficulty to propose a debt restructuration plan. The debtor files a proposal to the court to repay the total amount outstanding to the secured creditors. If the court admits it, a commissioner trustee is appointed, and if the majority of the unpaid creditors accept the proposal, the court will officially validate the proceedings.

Alternatively, a debt restructuring agreement (accordi di ristrutturazione del debito) aims to restructuring the debt so as to rescue the debtor company from bankruptcy proceedings. The debtor must file a report on its ability to pay the remaining creditors in full, who otherwise can challenge the agreement before a bankruptcy court by requiring verification that their claims will be paid as normal.

 

Liquidation

This procedure aims to pay out the creditors by realising the debtor’s assets and distributing the proceeds to them. The status of insolvency justifies the adjudication of bankruptcy by the court, even where the insolvency is not due to the debtor’s misconduct. The court hears the evidences of the creditors’ claims and appoints a receiver to control the company and its assets. This receiver must liquidate all of the company’s assets and distribute the proceeds to the creditors to have the proceedings formally concluded.

Insolvency trend Italy
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