Italy. Conversion success

«The Economist», 10 marzo 1934, p. 518

CONVERSION SUCCESS: The 61,000 million lire conversion from 5 to 3.50 per cent. has been a big success. The success of issue is the result of a marked movement of savers toward gilt-edged investments. The Treasury was quick to sense the trend of the movement. The average saver is still chary of risky industrial and agricultural investments and anxious to invest in State and other public securities. This was therefore the psychological moment for a far-reaching conversion of the public debt. Out of a total internal public debt of 98,029 million lire, 61,393 millions was in 5 per cent. Consols. Unfortunately, Consols were not convertible by reimbursement until December 31, 1936. This apparent obstacle to conversion, however, proved instead to be a condition of success. By a stroke of what might almost be called financial genius, the Treasury decided to request the bearers of 5 per cent. Consols to declare at once if they desired to be reimbursed on January 1, 1937. If they prefer reimbursement, nothing is to be changed in their respect; the interest of 5 per cent. will continue to be paid regularly for the three intervening years, until on January 1, 1937, the full nominal 100 lire capital will be due for reimbursement. The assenting holders, however, will receive in cash the full difference between interest of three years at 5 per cent. and interest at 3.1/2 per cent., i.e., 4.50 lire. They will also be exempt from all direct taxation and will receive 10 million lire in premiums (three of 1 million lire, six of 500,000 lire and 40 of 100,000 lire each) for every 1,000 millions assenting capital, to be drawn on December 20, 1934. The offer of 4.50 lire and the hope of a big premium in December next have cause something like a stampede in favour of the new 3.50 per cent. Consols. This new offer was a complete success. Out of a total of 61,400 million lire of the 5 per cent. Consols, only 123.3 millions have not been converted. The present conversion is a record in the financial history of Italy, the only comparable one being the 8,100 million lire 1906 conversion by Luzzatti-Majorana from 4 to 3.75 and, taking account of the change in the gold content of the lira, is more than double, and the immediate reduction is from 5 to 3.50 per cent.

After this conversion, the market in Consols experienced a setback, which is attributed mainly to sales by discomfited bulls. Before the conversion was announced, speculative operators, not always financially strong, were busy buying 3.1/2 and 5 per cent. Consols, trusting that the prices of both would go above par before conversion. As conversion was deemed certain, speculation for the rise was regarded as a safe bargain. The suddenness of the conversion announcement, before par was reached, confronted many operators with the necessity of covering by sales. But during the conversion week liquidation sales were not easy. Therefore when markets were again active, prices went down, old 3.1/2 per cent. Consols closing at 90.75 at the end of last week and new redeemable 3.1/2 per cents. at 94. It is said that actual prices were even lower, down to 88 and 92. The fundamental tendency, however, is towards a fall in the yield of gilt-edged securities. On February 22^nd the Official Gazette published a decree authorising the Land and Real Estate Mortgage institutes to convert their bonds (cartelle fondiarie) from 6 and 5 per cent. to lower rates; and it is believed that a similar authorisation will be given to all public bodies and companies that have issued debentures at 5 per cent. or more.

EXCHANGE REGULATIONS: A temporary tightening of the foreign exchange regulations was experienced in the last two weeks. Foreign cheques were not negotiable at prices different from those officially quoted. For a new days foreign exchange disappeared from the market, and importers had to rely exclusively on the Bank of Italy. Now the stringency is relaxed and the private market is reviving.

A lively debate in the daily press has followed the publication of an essay by Senator Agnelli in La Riforma Sociale. The president of the Fiat Company advocated the organisation of exports under the aegis of corporations. Goods exported should be sold collectively to foreign countries at world prices. If producers lost on the transaction, the loss should be bourne by a rise in the price of imported goods. Professor De Stefani, in Corriere della Sera, criticising the details, reaffirmed the thesis that foreign trade is becoming more and more a matter of public concern. Collective agreements regarding the quantities and prices of goods to be exchanged between two or more countries are bound to grow more numerous in future. On these plans to collectivise foreign trade cold water was poured by Signor Asquini, Under- Secretary for Corporations, in a speech to exporters of vegetables and fruits. Producers must rely mainly on their own efforts, without asking too much from the Corporative State. Reduction of costs must be the true foundation of an expansion of exports.

ECONOMIC INDICES: Meanwhile, foreign trade in January continued to contract. (In million lire)

Other economic indices for January, however, showed an improvement.

Thus the upturn in the trade cycle seems to be as general in Italy as elsewhere, tough confined to internal trade.