Italy is haunted by the pain of past economic crises

TREVISO, Italy — In the flat plains of Italy’s Veneto region, in a small town about 20 miles north of Venice, Antonio Carpenedo has developed unusual methods of making cheese. At La Casearia Carpenedo, wheels of cheese are dipped and aged in wine – red, white and Prosecco – while others are covered in hay and aged in barrels.

Mr. Carpenedo built this “drunken cheese” business from the ruins of a financial disaster. In the 1980s, rising interest rates shattered his previous cheese factory. “They bled us out,” he said, recalling rates of 27 percent. The company had to be sold and he started over.

Today, fear of another financial catastrophe caused by rising interest rates and economic uncertainty haunts his sons, who run the company, and has paralyzed their investment plans.

“Tariffs are rising and we don’t know what will happen,” said one of the sons, Ernesto Carpenedo. “If we get to the rates we had in the ’80s, that’s devastating, and you’re basically destroying the business.”

Over the past ten years, interest rates in the 19 countries that use the euro have been at historically low levels, and the European Central Bank has programs to encourage banks to lend generously to businesses. With inflation rising across the bloc, the central bank is changing course and tightening financing conditions in preparation for the European Central Bank’s first rate hike in 11 years, due Thursday.

This change is acutely felt in Italy, the eurozone’s third largest economy and a frequent source of political and economic headaches for the region. The central bank’s easy withdrawals in recent months have revived investor unease about Italy’s high debt burden and its commitment to economic reform.

Last month, the yield on government debt, a measure of a country’s borrowing costs that also serves as a benchmark for other loans, rose sharply. At about 150 percent of gross domestic product, Italy’s debt burden is the second highest in the eurozone.

Italy “is systemically important to the monetary union because of its size,” said Sarah Carlson, chief analyst for Italy’s sovereign rating at Moody’s.

Rising borrowing costs are is beginning to emerge as a concern across the continent. The European Central Bank has acted later than many of its international counterparts to tackle inflation, citing that most of the price pressure has been “imported”, due to global supply chain disruptions and rising energy costs, exacerbated by the war. in Ukraine. Now, amid signs that major price hikes threaten to anchor in the economy, policymakers have been forced into action.

In Italy, companies are used to navigating long periods of subdued economic growth and political turmoil. What’s new is the sudden burst of inflation and the end of ultra-low interest rates.

Since the introduction of the euro just over 20 years ago, inflation and interest rates have been low, making it easy to find the means to expand, said Livio Libralesso, the CEO of Geox, the shoe brand that founded in 1995. was founded in Montebelluna. The city has become a hub for shoe production in the Veneto region.

Companies no longer had to struggle against devaluations of the lira or large swings in currency value with neighboring countries, and Geox could focus on innovation. It was “a kind of heaven,” he said.

The weakness of the euro has been exacerbated by concerns that Europe will slide into recession as a result of energy supply disruptions. But the outlook for Italy is particularly challenging. The European Commission predicts that Italy will have the slowest economic growth in the bloc next year, just 0.9 percent, due to a decline in consumer spending as households austere, and less business investment due to weaker demand and rising borrowing costs.

There is a risk that Italy’s prospects will deteriorate further due to the country’s reliance on Russian energy. Before Russia invaded Ukraine, Italy got 40 percent of its imported gas supply from Russia; that has been reduced to about 25 percent.

Last week, without any warning, an era of political stability and economic reform was jeopardized: Prime Minister Mario Draghi’s technocrat-led coalition government appeared to be on the brink of collapse after just 17 months, as Mr Draghi tried to stop amid of political stalemates.

“You can always rely on Italian politics to throw a curveball,” said Federico Santi, analyst at Eurasia Group. It raised concerns about whether a new government would continue to implement the reforms needed to receive the European Union’s pandemic resources, worth around €200 billion. The Italian parliament will vote this week on the future of the government.

The Veneto region is an industrial area and known for its Prosecco, but its resilience to economic downturns and political unrest will be tested by the bleak outlook for the global economy.

In recent years, the Carraro group, which makes and exports tractor parts, has steadily continued its recovery from the 2008 financial crisis, using low interest rates to sell bonds to restructure its debt and then invest. This year, outside of Padua, the company planned to refinance some of its debt by borrowing €120 million, expecting better terms than the 3.5 percent it paid on its previous bonds.

But at 8:30 a.m. the day the Padua executives opened the book for orders, they had to close it again. It was February 24 and Russia had just invaded Ukraine. Now the company’s refinancing plan has been put on hold.

Yet the more pressing issue for the Carraro Group is the rising cost of running its business. The increase in gas and electricity tariffs would have cost the company €10.5 million more this year if it had not been able to use its financial trading division in Luxembourg to hedge against rising prices. Instead, energy costs Carraro €5 million more.

“The moment is very difficult and very complicated,” said Enrico Carraro, the company’s president. “At the moment there are all the ingredients for a major and deep crisis. Maybe the heart of the storm won’t hit so hard, but we have to be ready.”

For smaller companies, there are fewer ways to hedge against rising costs. About 20 kilometers north of Carraro’s headquarters in Castello di Godego, Stocco, a metal furniture manufacturer, has more than doubled the cost of the iron it needs since October.

CNA Treviso, an association for small and medium-sized businesses in the region that also helps businesses obtain credit at low rates, estimates that companies face cost inflation of between 15 and 25 percent. Most of this is due to high energy costs.

With so much uncertainty about the future of energy and commodity prices, knowing what to do next is a challenge for companies with limited flexibility in setting prices. Gianpaolo Stocco, co-owner of the furniture company, said commercial customers are waiting for Stocco’s pricing for next year’s catalogs.

Prices could continue to rise, but “if I use the current price, I could also be out of the market by 2023 when it falls again,” Mr Stocco said.

Inflation in Italy is 8.5 percent, but Mr Stocco expects the inflation his company is experiencing next year to be even higher.

He tells customers that Stocco’s prices will increase by 10 percent.

The expectations for such high inflation are bad for the central bank. The future path of inflation has a psychological component; higher prices can prove themselves when companies and households expect them and in response set higher prices and demand higher wages.

Economists don’t expect interest rates in Europe to rise anywhere near the levels seen in the 1980s, when double digits were the norm, as recession forecasts mount and the window for rate hikes narrows. But the combination of high energy prices, high inflation and slow economic growth has created enormous uncertainty for companies that cannot predict when supply chain disruptions will ease.

La Casearia Carpenedo, the cheese maker, expanded and invested rapidly during the period of low interest rates, borrowing loans to fit roofs with solar panels and building machines to clean the barrels. It has spent more than half a million euros on investments over the past decade. Now, new investments have been put on hold, leaving the family with no hopes of opening a school to train new cheesemakers, buy land to grow its own grapes, and plant a herb garden.

These challenges come on top of the existential questions companies often ask themselves about the future of their industry.

At La Casearia Carpenedo, there seem to be two stark options: return to a small artisanal producer or jump into a major international company? “This is the question we are assessing,” said Ernesto Carpenedo. But “it is not easy today to understand what will happen tomorrow.”

Elisabetta Povoledo contributed reporting from Rome.

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