Credit crunch in Italy: Evidence on new ISAE survey data

1. Per aggiungere alla diapositiva il logo della società: • Scegliere Immagine dal menu Inserisci • Individuare il file con il logo della società • Scegliere OK • Per ridimensionare il logo: • Fare clic s un punto qualsiasi del logo. Attorno all'oggetto verranno visualizzati i quadratini di ridimensionamento. • Per ridimensionare l'oggetto, utilizzare i quadratini. • Per conservare le proporzioni dell'oggetto da ridimensionare, trascinare i quadratini di ridimensionamento tenendo premuto MAIUSC. Credit crunch in Italy: Evidence on new ISAE survey data Bruxelles, October 12th, 2009 Stefano Costa and Patrizia Margani ISAE, Rome

2. Aim of the research • Using the new “credit” section of the ISAE’s survey on the manufacturing sector, it is possible to provide a timely picture of current bank-firm relationships, and to investigate the presence of clues of credit crunch.

3. Background • Since the beginning of the current crisis, the real risk for the Italian economy was that, in presence of a strongly bank-oriented economic system, the drying up of the interbanking market would end up by tighten the credit access for firms. • The risk of credit crunch became the most evoked issue in institutional and academic contexts. • As the literature has shown (see e.g. Berensztein and Jong-Wha Lee, 2000; and Bank of Italy works) this type of issues are best addressed using firms-level data.

4. The ISAE survey on manufacturing firms (the credit section) (1) • The survey is conducted monthly on a sample of about 4,000 firms. • It collects information on many structural aspects of the firms, including the number of employees, industrial sector, location, export share on turnover, productive internationalization (offshoring). • In March 2008 a new section has been included, focusing on the firm-bank relationship. More specifically, each firm is asked whether: • during the previous quarter its credit access conditions improved, worsened or remained the same; • it obtained the loans requested and, in that case, whether the loan conditions worsened; • (since June 2009) in case of worsened lending conditions, in what terms this occurred: higher interest rates, more personal guarantees, more real guarantees, limits to the loan amount, other costs; • if it did not obtain the loan, whether this was due to a denial by the bank or a firm’s giving up because the contractual conditions were too costly.

5. The ISAE Survey (2) On this basis, we define a firm as “rationed” when it does not obtain the loan. More in detail, we say that a rationed firm is: • “strongly rationed”, whether the bank rejects the loan application; • “weakly rationed”, whether the firm gives the loan up because of too costly conditions. In doing so, using the sample data we can verify at least two features that, according to the literature, are observed during a credit crunch: a) a remarkable increase in rejection rate of loan applications b) a disproportionate drop in loans to small and medium enterprises (SMEs) Moreover, when the crisis is global, it is interesting to explore the “internationalization effect”, namely to compare the credit conditions of “national” firms (i.e. those operating domestically) to the ones faced by the “international” firms (that sell or produce abroad)

6. Evidence (1) The net percentage of firms that face worsening credit conditions (a common indicator of tensions on credit markets) increases sharply in Fall 2008, reaching a maximum in Dec.08. The situation then improves, but it is still worse than in the pre-crisis period. Net percentage of firms that face worsening credit conditions, by firm size

7. Evidence (2) • A strong credit tightening clearly arose in Fall 2008: in Sep.08-Nov.08 the overall share of rationed firms jumped from 3.8 to 6.3%. • During last months, the credit rationing tended to lessen, but the differences between the size classes are now widening once again. Percentage of rationed firms, by firm’s size

8. Evidence (3) SMEs are increasingly more rationed than Large ones

9. Evidence (4) From a geographical point of view, the rationing affects almost uniformly all the Italian macroareas, even though since last June it has been more serious for Southern firms (whose size, indeed, is lower than elsewhere in Italy).

10. Evidence (5) Since the beginning of the (credit) crisis, the “strong” rationing has been overwhelming the weak one (+26 p.p. in Mar.08 – Sep.08; +11 p.p. in Nov.08 – Sep.09). The relative importance of strong and weak rationing (in percentage of rationed firms)

11. Evidence (6) • But all that glitters, even for large enterprises, is not gold: they are less rationed than in the past and with respect to SMEs, but at higher costs (especially in terms of higher interest rates and real guarantees). • SMEs, in turn, face usually higher interest rates than large ones do, so that there is little room for further increases. • No significant geographical effects. Percentage of firms that obtained the loans, but at higher interest rate

12. Evidence (7) Percentage of firms that obtained the loans, but with more real guarantees (The SMEs are asked for more personal guarantees than real ones)

13. Evidence (8) When the crisis is global, the firm’s internationalization (usually considered a successful form of firm growth) can become a source of opacity in the relationship with the bank, leading the latter to tighten the credit terms or to ration the firm. In this case, the productive form of internationalization (the offshoring), implying higher sunk costs and country-risk, is associated to the highest incidence of rationing. Percentage of rationed firms, by type of internationalization

14. Some conclusions • On the basis of the evidence from the ISAE’s sample, at least two factors usually related to a credit crunch clearly appeared in Italy in Fall 2008. • Even though in last months the credit access conditions generally tended to improve, the situation is still far from the pre-crisis one: • the SMEs-large firms gap is widening, • some geographical effects are appearing, • where the strong rationing decreases, the weak one increases. • The higher the degree of firms’ internationalization, the worse the credit conditions faced by the Italian manufacturing firms.