Insight: Parmesan bonds replace bank loans in Italy's new credit order

Thu Feb 18, 2016 10:35am EST
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By Isla Binnie, Francesca Landini and Giulio Piovaccari

ROME/MILAN (Reuters) - When Parmesan prices proved too volatile for Italy's strained banks a dairy cooperative near Bologna came up with a novel solution to its funding needs, bonds backed by wheels of cheese.

But 4 Madonne Caseificio dell'Emilia remains an exception among small businesses struggling to get long-term funds in Italy, where a credit crunch risks holding back a fragile economic recovery after more than a decade of stagnation.

At the heart of the problem is the failure by successive governments to cut the cosy ties between Italy's banks and companies, weaning them off loans and onto capital markets, something Bank of Italy Vice Director Fabio Panetta says "could activate a virtuous circle between market growth, investments and economic development".

Because many small enterprises have never had to present a business plan or detailed accounts to get a loan, they are ill-equipped to make the transition cheesemaker 4 Madonne did in filing quarterly accounts and certifying balance sheets.

"It is a challenge for us because these are things we never did, not because we lack transparency but because that's how the system works," 4 Madonne's Chief Financial Officer Andrea Setti told Reuters in a telephone interview.

"In our sector you balance the books at the end of the year, everyone agrees and the discussion ends there."

Such light demands from banks were the norm in Italy until three years of recession bankrupted thousands of clients, piling up 200 billion euros (154.30 billion pound) of bad debt on banks' balance sheets.

Their response was to cut lending drastically, leaving small firms to find other ways to pay the bills overnight.   Continued...

Worker inspects wheel of Parmesan cheese at storehouse shelf 4 Madonne Caseificio dell'Emilia dairy cooperative in Modena, Italy, February 16, 2016. REUTERS/Alessandro Bianchi