When the credit gets tough

By Valentina Magri

Credit Crunch in Italy

“When the going gets tough, the tough gets going”, said Joseph P. Kennedy, father of the US president JFK. But what happens when the credit gets tough?

Credit crunch in the UK

The word “credit crunch” was unknown to most of the Brits until 9 August 2007, “the day that world changed”, according to Adam Applegarth, chief executive at the British bank Northern Rock. On that day, the French investment bank BNP Paripas stated that they will not be able to take money out of two of its funds since they can’t value their assets. This statement triggered a sharp rise in the cost of credit.

On 4th September 2007 the Libor rate (the rate at which banks lend money to each other) was 6.7975 per cent, while the base rate of the Bank of England was 5.75 per cent.

On 13th September 2007, the BBC revealed that Northern Rock obtained emergency financial support from the Bank of England. This news caused the biggest bank run in 150 years: depositors withdraw £1 billion the day later. BBC business editor Robert Peston labelled this fact as “the most tangible sign that the crisis in financial markets is spilling over into businesses that touch most of our lives”. As prophesied, a reduction in the availability of credit  – the credit crunch – broke out and caused a downturn. The economic crisis in the UK lasted six quarters (from  Q2 2008 to Q4 2009).

Now the economy is out of recession and the level of output “has almost regained its pre-recession peak” (January 2008) according to the NIESR (National Institute for Economic and Social Research). However, the latest ECB’s report on MFI (Monetary Financial Institutions) lending to non-financial corporations (NFCs) and households for February 2014 signals that the composite cost-of-borrowing indicator remains unchanged. On a monthly and yearly basis, the business lending volumes keep on decreasing for NFCs and households.

How to cope with the credit crunch: a joint idea

Concerns about the credit crunch are growing in the Eurozone, where the recovery is weak and fragile, as the ECB’s president Mario Draghi keeps on repeating. At the ECB’s press conference in April, he called for reviving “plain vanilla” ABS (acronym of asset-based securities) in order to give more credit to SMEs. The ECB and the  Bank of England also released a joint paper during the IMF and World Bank spring meetings where they recommend regulators at global and EU levels ease up on rules regarding the ABS market, tightened after the financial crisis. According to the study, “central banks eligibility criteria […] have already demonstrated to filter undesiderable ABS (proven by default performance) and are set in a manner free from conflicts of interest, and are widely accepted by markets participants”. Thus, “high quality securitisations should receive treatment commensurate with these reduced risks”.

How to cope with the credit crunch: a joint practice

But while the solution pointed out by the central banks is still under discussion, there are countries affected by a severe credit crunch that cannot wait. One of them is Italy. According to the latest Bank Lending Survey by the Bank of Italy, in the first quarter of 2014 “banks have relaxed criteria for the supply of loans to households for house purchase”, but “the supply conditions for loans to firms remained slightly restrictive”. Another problem of Italy is that is too bank-based.

In order to fix the situation, Italians are “importing” business models from Britain. As an illustration, Zopa Italia replicated the model of the English Zopa and has been the first company to introduce social lending (credit given by people using the web) in Italy (2008). It closed in June 2009 due to problems with the Bank of Italy and reopened as Smartika in 2012. The business model of the crowdfunding, illustrated by companies such as Justgiving.com, has been introduced in Italy thanks to Iodono and RetedelDono.

The story is different for Twin Advisors Limited, which has just opened its offices in London. It is a financial consultancy company that includes a broker (GMSA Investment Limited) and an asset management company (Fondo Atlantide). The latter manages an equity and a bond fund, which invests also in minibonds: bonds targeted to SMEs introduced in Italy in 2012 by the PM Monti. This structure allows Twin Advisors to act like the corporate department of an investment bank with the features of a family banker.

The company aims at financing Italian companies through minibonds, but what about promoting them in Italy? Alessandro Sannini, CEO of Twin Advisors, has already tried to spread minibonds, but they are far from booming in Italy. He explained: “We have decided to move to the City not only because of a matching of the interests of the partners of the company, but especially to reach international investors that appreciate minibonds, such as those from the Nordics. In London we can make a difference in order to help the internationalisation of the made in Italy. This is rewarding both for the investors who seek gains and for entrepreneurs who receive coaching over financial innovation and internationalisation”.

Eventually, when the credit gets tough, the Italian gets going (to the UK).

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