Coface is France’s leading export credit insurer, with a volume of consolidated premiums of Eur 1,3 bn in the three quarters of 2023 (the full year is not finalized yet). Understanding the reliability of companies whose debt it insures is crucial for its business. For purposes of debt, Coface monitors continuously the financial health of businesses in many countries, to which Coface’s analysts assign an average grade, different from the ones issued by rating agencies like Moody’s or S&P’s because they do not appraise the health of public finances. Italy is no exception, and given its size, the judgment of Coface on Italian companies’s financial solidity is of paramount importance for international companies and investors dealing with the Mediterranean country. Hence its decision, dating back to September 2022, to downgrade Italy to B, which is equivalent to a fairly high risk, down from A4 (moderate risk), was quite relevant. “ We became more selective in our insuring of trade with Italian firms ” explains Marcos Carias, the French insurer’s Southern Europe economist covering Italy, Greece Cyprus and Malta. But the risk factors attached to that move did not materialize. Moreover, the company’s prospects for the country are improving, despite the fact that in Europe some kind of stagnation is expected in the first half of the year, with the manufacturing industry still penalized by persistently high costs and sluggish external demand, and the Red Sea crisis is pushing transportation costs up, as Coface’s chief economist Jean Christophe Caffet underscored at a convention held in Paris recently (see the press release), on the occasion of which Carias explained BeBeez International. why, although it is still too soon to talk about an upgrading, things have turned towards the right direction.
Q: Which factors led Coface to downgrade its rating of Italian companies, to begin with?
Carias: When we talk about risk assessment, it is important to always distinguish between the absolute level and the variation, or the expected one, of the rating. Let’s go back to the time when we downgraded, right after Italian Prime Minister Mario Draghi resigned from his premiership. That move sparked significant uncertainty on the market, indeed our decision was shared by other players in the industry. We had to understand what political posture the Meloni government would take. Meanwhile, out of the political sphere, we had also to evaluate the extent to which the Italian economy could manage to diversify its sources of energy, particularly the gas supply, away from Russia, shortly after the eruption of the Russia-Ukraine war. We saw that all the above stated risk factors did not materialize fully, but we maintain a cautious stance because we are still waiting for the effects of the economic slowdown seen in 2023 to emerge in Italian companies’ solvability before anticipating a full recovery that we expect towards the end of 2024.
Q: In your opinion what are at present the reasons to be optimistic about the Italian economy?
Carias: It do not think it is entirely correct to talk about optimism. A more correct approach would be saying that we dodged the bullet. I mean that at the time the Ukrainian crisis erupted, everyone was very concerned about its likely impact, deemed as devastating, on an economy heavily reliant on Russian gas like the Italian one. Instead, nothing so terrible occurred, and market players including us took a sigh of relief.
Q: So now that the big danger is left behind, what is ahead of us?
Carias: We still have an economy facing serious challenges, such as a structurally higher interest rates and energy prices, albeit the latter are not so high as they were in 2022, but there are several resilience factors at work, i.e. the availability of EU recovery funds and as regards to sovereign risk the still available Transmission Protection Instrument, passed on July 2022, which allows the ECB to buy on the secondary market, if necessary, the government bonds issued by Eurozone countries as long as the latter maintain sound political relationship with European Commission.
Q: That is also why maintaining a good relationship with EU institutions os of paramount importance for the Italian government. However, this point quite often sparks tensions among parties in the ruling majority. Is it a concern for Coface?
Carias: Of course, always it is. But the instances raised by the Euroskeptical component of the ruling alliance cannot trespass some boundaries set in agreement with the EU. In other words, there is a sort of double accountability: the current government stays loyal to the EU and at the same time is aware that it must meet its voters’ expectations. The Prime Minister’s ability to manage this equilibrium is key, but the Italian government shows a fairly strong willingness to cooperate with the EU. Of course we cannot predict where electors will go in the next few years, but for the time being this is another resilience factor.
Q: Do you think that 2024 European elections will change this equilibrium significantly?
Carias: We will have to pay special attention to what will happen within the ruling coalition.
Q. Despite the resilience factors, the massive flow of public funds channeled to the Italian economy during the pandemic and even after the explosion of the Ukraine crisis, in the form of subsidized loans, guarantees and moratoriums is slated to shrink considerably and turn much more selective. How do you regard this change?
Carias: It is more selective, but the limit of guarantees was doubled to 5 from 2,5 million euro. The point is that all that money will no longer be available to everyone for an unlimited period of time. So the economy is turning back to normal, where marginal firms struggling to stay in business will find harder to fund themselves. But at the same time the State will keep supporting the economy, thanks to European funds, and will invest in strategic sectors such as energy, digital technologies, food and also education, in order to stimulate the creation of skilled workforce. Hence, companies active in those sectors will grow faster. We will see a rise in insolvencies and late payments among weaker firms, and simultaneously stronger firms performing better , but also of firms performing well. That is normal.
Q: What kind of increase in bankruptcies and insolvencies do you expect?
Carias: First of all, in Italy the convergence of those aggregates towards the pre-Pandemic levels has been slower than in other European countries. We saw them rising no sooner than in 2023, on account of both the stronger recovery in 2021 and 2022 as compared with the rest of Europe and the length of judicial procedures. In Italy, insolvencies only started increasing in Q4 2022, when they were some 40% under 2019 levels, and remain 20% under 2019 levels. In contrast, as of the latest readings, business insolvencies in France are around 20% over 2019 levels. Trends in payment behavior are quite similar. According to data collected by the European Commission on a sample of almost 14 thousand firms, around 57% of firms reported experiencing payment delays in 2019. This number went down to 52% in 2022, and increased to 54% in 2023. So, on a worsening trend, but still better than before. At the EU level, 47% of surveyed firms reported payment delays in 2019, and we have already regained the same number in 2023.
Q: And what is the outlook?
Carias: Insolvencies will continue rising in Italy, not dramatically, but progressively. Look at it as a marathon. In the post-pandemic years the Italian runners went fast without significant stress thanks to strong Gdp performance and the government financial ad. Now those supporting factors are no longer that strong, so what will happen is that some runners will withdraw from the race, simply.
Q: Do you think that the increasing recourse by Italian firms to the so called supply chain finance, hence factoring, confirming, invoice trading and so forth, bolstered by technology, might change things?
Carias: It is a natural development, but also a very good one. In the period between the sovereign debt crisis and the pandemic the world economy cruised vey calm waters, with interest rates very low, energy and commodity prices stable and fairly low, supply chains quite reliable in a very globalised business environment. The upheaval of this happy landscape multiplied the risk factors capable to make a deal unfeasible. So, instruments like trade insurance and supply chain finance may reduce considerably those risks, and that is as more positive as more companies see those instruments as resources. Supply chains today are quite complex and everything helping to reduce risk in each ring of the chain is welcome.
Q: On the other hand, this increases the amount of risk transferred to financial markets.
Carias: “This is why we invest in better risk analysis (among other things being more data-dependent) and also risk mitigation (for example through a closer partnership with reinsurers). Just like banks, the industry has had to improve its regulatory standards since the 2008 crisis, and so we have the resilience to justify the risk we are undertaking.
