The unilateral extension of trade credit to the Italian government

by on July 7, 2013 at 7:40 am in Current Affairs, Uncategorized | Permalink

An ongoing issue is that the government is simply delaying payments to private suppliers:

Beppe Grillo, leader of the opposition 5-Star Movement, has long hammered on this point. In April, during the post-election interregnum, he’d clamored for “the immediate payment of about €120 billion” that the government and public entities owed the private sector.

The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers.

There is also this:

…[government] expenditures rose 1.3% in the first quarter, while revenues remained flat.

You can read more here, hat tip Fabrizio Goria.  Right now the Italian state is taking an average of about six months to settle private bills, longest in the EU.  You can think of these delayed payments as a form of anti-stimulus of course.

Michael G Heller July 7, 2013 at 8:25 am

“You can think of these delayed payments as a form of anti-stimulus of course.”

Au contraire (or should I say invece) — if the Italian government wasn’t using its leftover money to artificially stimulate private employment and private consumption it would have some leftover to pay the private bills.

Michael G Heller July 7, 2013 at 8:46 am

When you consider all the unnecessary costs the Italian state imposes on private business by not having reformed labour market regulation … it’s a double whammy really.

KenF July 7, 2013 at 10:00 am
PK July 7, 2013 at 10:25 am

It is a selective default in disguise, isn’t it?

MDS July 7, 2013 at 11:04 am

Kind of reminds me of Illinois. So far it’s problem is much smaller, at around $9 billion in late unpaid bills, but it certainly a problem when state-issued cards get declined. On the bills it did pay, it racked up $86 million in late fees, the most in the nation.

“We regret having to cut off the State of Illinois, but our accountants concluded that with the 28 percent interest rate the state pays, coupled with the monthly late-payment penalty fee for every payment since 2003, and only minimum disbursements made, we figure Illinois will have settled its credit card debt by the year 2119.”

http://www.ksdk.com/news/article/362581/70/Illinois-leads-nearly-all-states-in-late-fees

http://schmuckweekly.com/illinois-government-credit-card-declined-at-papa-johns/

MDS July 7, 2013 at 11:12 am

Just realized the second link was parody. I clicked the first couple of google results because my memory of the issue was hazy. Sorry about that.

Bob Knaus July 7, 2013 at 11:38 am

The article seems shallowly written, as if it were by a journalist rather than someone with business experience. The relevant fact is this… vendors are now permitted to charge the Italian government interest on receivables greater than 30 days:
http://www.italylegalfocus.com/en-us/Newsletters/Client-Alert-February-2013.asp

In the “normal” interest rate environment of the 1980′s, my standard terms to customers were 2% discount 10, net 30, 1.5% monthly 30+. This included a large utility and several government agencies. Most every other small business did the same. It helped cash flow by prodding big customers with creaky payment processes, as their cost of financing payables was considerably less than 18% annually.

If this becomes standard business practice in Italy, the payments problem will solve itself. Even the dullest pencil-pusher will see the wisdom of borrowing at 8% from the bond market to avoid 18% vendor charges.

KenF July 7, 2013 at 11:56 am

You can read the bio of the “journalist:
http://www.businessinsider.com/author/wolf-richter

derek July 7, 2013 at 1:12 pm

During the 90′s some socialist provincial governments issued bonds that paid 16%.

It isn’t a matter of paying less interest, it is a matter of finding a sucker, any sucker who will lend you money. Not paying suppliers is a great way of doing it, you can get 3,4 months of operating capital before the screaming starts, then you have them by the short hairs, either keep supplying or we won’t pay anything.

This is insolvency.

A note of interest. The age of my receivables to large corporations is a very strong indication of the state of the economy. Usually they are 25-35 days, but they stretch it out, especially on the larger invoices when their sales are stagnant. In this market survival is not making a sale, it is getting paid in a timely way.

x July 7, 2013 at 1:59 pm

Honestly, this idea that people transfer goods without simultaneous payment is utterly bizarre.

I think it’s due to the absurd delays in bank wire transfers, that take days despite the fact that they could be done in seconds with obvious computer technology.

The best solution would be to force banks to complete wire transfers within 30 seconds without any fee.

Then couriers would just not physically deliver the goods unless payment is done and verified on a smartphone.

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