Stock Exchange Depression – Foreign Loans for Industries -Lira Stabilization Policy

«The Economist», 13 marzo 1926, p. 520

Turin, March 2

From month to month the stagnant or even bearish situation of the Bourses absorbs the attention of economic circles. A circular of a well- known stockbrokers’ firm (published in II Sole on February 28l ) made, among others, the following comparisons:

With rates of dividends ranging, with a few exceptions in the banking and sugar sections, from 6 to 10 per cent., and with current prices well below – in some cases over 50 per cent, below – the peaks of 1925, the Stock Exchanges should present attractions for speculators and investors. Investors, however, are frightened out by the heavy losses sustained in past year, and speculators are interrogating economic Sibyls as to probable trend of events. The abolition of the obnoxious 15 per cent, tax on dividends of bearer securities, and of the taxation of premiums on securities issued above par, and the reduction of the interest paid on the one-year Exchequer bills from 6 to 5.50, all failed to draw the public to the Bourses.

The Finance Minister, Signor Volpi, justly remarked yesterday at Venice that it was not his fault if the public, which has bought 285 million lire of Exchequer bills at 6 per cent, in January, bought even larger sums in February after the Treasury had reduced the interest allowed to 5.50 per cent. The truth is that investors have lost faith in industrial securities owing to the spectacular decreases in prices revealed by the above table; and, reassured by the firmness of the lira, prefer to invest their savings in State securities, preferably Exchequer bills.

The appetite of the public for State securities has given rise to an interesting experiment in foreign exchange regulation of foreign loans issues. Italian industries, especially public utilities bodies, through the instrumentality of the Public Utilities Credit Institute (Istituto di credito per le imprese di pubblica utilità) are able to raise loans, indirectly guaranteed by mortgages to the institute, in the United States. A loan of 20 million dollars at 7 per cent., repayable in 26 years, was issued on February 26th by the Chase and Blair groups on behalf of the institute in the principal American cities. The problem was how to enable Italian industries to utilise the loan without transferring the proceeds of it to Italy. A Royal Decree of February 18th authorised the Treasury to buy, at a fixed rate, dollars or other foreign money credits raised by the Public Utilities Credit Institute. The 20 million dollars are, therefore, placed in New York to the credit of the Italian Treasury, and the Treasury opens a credit of 500 million lire for the institute at the Bank of Italy. When interest and amortisation are due the institute will pay, say, 50 million lire in Rome to the credit of the Treasury’s Bank of Italy account, and the Treasury will place a sum of 2 million dollars to the credit of the institute in New York. It appears that the sums placed to the credit of the Italian Treasury in New York will go to increase the fund of 100 million dollars of the State loan, and will be available for stabilising the lira. On the other hand, the paper issue in Italy is not increased as a consequence of the Treasury buying dollars in the United States and placing lire in Italy at the disposal of the Public Utilities Institute. As a matter of fact, the total paper issue has decreased from 21,449.6 million lire at December 31st last to 20,753.9 million lire at January 31, 1926.

By the method adopted Italian industry obtains credit in a foreign market from interested and keen leaders, but by the sale of the proceeds of the loan to the State is able to utilise in Italy Italian savings, which, owing to the peculiarities of the present Bourse situation, prefer to seek an outlet in State securities. The hope is that, by maintaining the lira at a stabilised level, a new equilibrium of internal and external prices, a reduction of costs and a revival of faith in industrial securities will be reached.