Italy. Instituto mobiliare. Bank of Italy. Budget

«The Economist», 14 gennaio 1933, pp. 74-75

Turin, January 2

The money market situation remains very much in the forefront of public discussions. A first public issue by the Italian Instituto Mobiliare is taking place from December 27th to January 5th, for an amount of 100 million lire 5 per cent. nine-year debentures, with an issue price of 980 lire. The present head of the Institute, Senator Mayer, has not availed himself of the right to make issues guaranteed by the State. These debentures are guaranteed exclusively by a first lien on the assets of the debtors. As Senator Mayer is cautious of advancing money except on very safe margins, this issue will be surely well received. Critics observe that the big original programme of the Institute can thus be realised only in the very long run, as first-class guarantees are difficult to find anywhere. What, then, will happen to the frozen bank credits to industry, which it was hoped to unload on the shoulders of the Institute with the aid of the State guarantee ? A notable part of these frozen assets has been transferred in the meantime to the Bank of Italy. From December 31, 1927 (when the lira was stabilised), to December 20, 1932, the note issue, as a consequences of the reduction of prices and trade, was reduced from 12.1 to 7.2 milliard lire. Other items in the bank’s balance sheet did not change at all or even increased; discounts and advances rose from 5.5 to 6 milliard lire. As this growth seems incompatible with the restriction of business, Signor Mazzucchelli’s suggestion seems plausible, that perhaps two-thirds of these 6 milliards are not commercial but financial bills – i.e., frozen credits taken by the bank of issue to prevent undesirable developments of the crisis. Signor Mazzucchelli estimates that the cost to the public exchequer of various aids to credit has amounted from 1923 to 1932 to a sum already paid of 3 1/4 milliard lire, to which must be added 5 milliard lire in course of liquidation. Clearly, Senator Mayer prefers to keep the new Institute aloof from any such entanglements with the past.

The programme of liquidating past over-investment remains unsolved. On December 27th there took place at Milan the shareholders’ meeting of the Unione Esercizi Elettrici Company, perhaps a typical example of many similar cases. On a total of 1,015 million lire on the liabilities side, the capital and reserves amount to 392.3 million lire. The burden of interest on the remaining part (mostly debts to third parties) reduced the net income to a quarter million lire, an insignificant sum in comparison with a working capital of nearly 400 million lire. If industry could be financially reorganised so that the burden of fixed interest debts became less crushing, the worst of the crisis could be said to be over. For the present, investors subscribe heavily only to public issues. The Milan Municipality in a few hours closed a subscription to a 30 millions 5 per cent. one-year bond issue.

The floating debt of the State rose on November 30^th to 7,212 million lire, a remarkable figure, mostly originating out of small deposits at the postal savings banks. Thanks to the small saver, the State Exchequer is able to keep a current deposit at the Bank of Italy of 3 milliard lire, and in its turn the Bank of Italy is able to make the above discounts and advances on financial paper, without increasing the note issue. The experience of 1893-98 is repeating itself again; and as in 1905 the experience was closed with great success and the State was able to reduce by free conversion the interest on public debt to 3 1/2 per cent., we may hope that in a few years the present burden of frozen assets which is weighing on the Bank of Italy will be liquidated, and the State will then be in a position to make a second great public-debt conversion. The Government has paved the way by a solemn declaration that no forced conversion is contemplated. The next steps should be, firstly, the liquidation, by a funding operation, of the consequences of past credit errors, and, secondly, the current years’s outlook is rather pessimistic again: the estimated deficit in the first five months (July-November) being 1,785 millions against 1,381 millions in the corresponding period of last year. The budget estimates recently approved by the Cabinet for 1933-34 close with an estimated deficit of 2,909 million lire, which, if it is not underestimated, constitutes an improvement.

Internal savings are able for the time being to fill the gap between revenue and expenditure. But it is imperative that in future the gap shall be filled by restoring the balance, before the sources of the savings are dried up – not an impossible task, but one that requires to be earnestly taken up at once.