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Italy Is Haunted by the Pain of Past Economic Crises

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Treviso, Italy — In a small town about 20 miles north of Venice, on the flat plains of the Veneto region of Italy, Antonio Carpenedo has developed a rare cheese-making method. At La Caseria Carpened, cheese rings are dipped in red, white and Prosecco wines for aging, while other cheeses are covered with hay and aged in barrels.

Carpened founded this “drunk cheese” company from the wreckage of the financial crisis. In the 1980s, rising interest rates shattered his previous cheese-making business. “They dried us,” he said, recalling a 27 percent rate. The business had to be sold and he started over.

Today, fears of another economic catastrophe caused by rising interest rates and economic uncertainty have plagued his sons who run the company and paralyzed their investment plans.

“The rates are rising and I don’t know what will happen,” said one of his sons, Ernest Carpened. “When you reach the 80’s rate, it’s catastrophic and basically kills the company.”

Over the last decade, interest rates in 19 euro-using countries have been at record lows, with the European Central Bank A program that encourages banks to lend generously to businesses. Inflation is currently skyrocketing across the block, and the central bank is tightening funding terms in preparation for the European Central Bank’s first interest rate hike in 11 years, scheduled for Thursday.

This change Italy, the third-largest economy in the euro area and a source of political and economic headaches in the region, is facing serious problems. The central bank’s easy withdrawal of funds over the past few months has revived investor anxiety over Italy’s high levels of debt and commitment to economic reforms.

Last month, the yield on government debt, a measure of the country’s borrowing costs, which also serves as a benchmark for other loans, soared. With about 150% of GDP, Italy’s debt burden is the second highest in the euro area.

Italy is “systemically important to the moody union because of its size,” said Sarah Carlson, chief analyst for Moody’s Italian sovereign rating.

The rise in borrowing costs It is beginning to emerge as a concern for the entire continent. The European Central Bank to deal with inflation due to the fact that most of the price pressure was “imported” as a result of the global supply chain turmoil and rising energy prices exacerbated by the war in Ukraine. Acted later than many international response agencies. Policy makers are now taking action amid signs that significant price increases are at increased risk of becoming established in the economy.

In Italy, businesses are accustomed to overcoming prolonged economic growth and political turmoil. What’s new is the sudden surge in inflation and the end of ultra-low interest rates.

Livio Libralesso, CEO of the shoe brand Geox, founded in 1995 in Monte Berna, said inflation and interest rates have been low and it’s easy to find expanding resources since the euro was introduced more than 20 years ago. Stated. The city is the center of shoe production in the Veneto region.

Companies no longer have to fight devaluation of lira and large fluctuations in currency value and neighboring countries, allowing Geox to focus on innovation. He said it was “a kind of heaven.”

The depreciation of the euro has been heightened by concerns that the turmoil in energy supply could put Europe into recession. But the outlook for Italy is particularly difficult. The European Commission predicts that Italy’s economic growth will be the slowest next year at just 0.9%, due to lower consumer spending due to household cuts and lower business investment due to weaker demand and higher borrowing costs.

As Italy relies on Russia’s energy, there is a risk that Italy’s outlook will worsen. Before Russia invaded Ukraine, Italy had 40 percent of its imported gas supply from Russia.It has been Reduced to about 25 percent..

Last week, with little warning, the era of political stability and economic reform was threatened. Mario Draghi’s technocrat-led coalition government appeared to be on the verge of collapse just 17 months after Draghi tried to quit in politics.

“It’s always reliable for Italian politics to throw a curve ball,” said Eurasia Group analyst Federico Santi. It raised concerns about whether the new government would continue to adopt the reforms needed to receive the European Union’s pandemic bailout fund worth around € 200 billion. The Italian Parliament will vote on the future of the government this week.

The Veneto region is an industrial area and famous for Prosecco, but its resilience to recession and political turmoil is tested by the bleak outlook of the global economy.

In recent years, the Cararo Group, which manufactures and exports tractor parts, has been steadily recovering from the 2008 financial crisis by selling bonds at low interest rates and restructuring and investing in debt. This year, companies other than Padua planned to refinance part of their debt by borrowing € 120 million, hoping to get better terms than they were paying for their previous bonds of 3.5%. ..

But at 8:30 am on the day Padua executives opened the book for an order, they had to close it again. It was February 24th, when Russia had just invaded Ukraine. The company’s refinancing plan is currently pending.

Still, the more pressing issue for the Cararo Group is rising operating costs. Had it not been possible to hedge price increases using Luxembourg’s financial trading sector, higher gas and electricity prices would have cost € 116 million this year. Instead, energy costs more than € 5 million for Cararo.

“The moment is very difficult and very complicated,” said Enrico Cararo, chairman of the company. “At this moment, there are all the elements that pose a big and serious crisis. The heart of the storm may not hit that hard, but we need to be ready.”

For small businesses, there are few ways to hedge the rise in costs. Stokko, a manufacturer of metal furniture about 12 miles north of Cararo’s headquarters in Castello di Godego, has more than doubled the cost of iron since October.

CNA Treviso, an association for small businesses in the region that helps businesses earn credit at low interest rates, estimates that businesses are experiencing cost inflation of 15% to 25%. increase. Most of them are due to high energy rates.

The future of energy and commodity prices is so uncertain that it is difficult for companies with limited pricing flexibility to know what to do next. Furniture company co-owner Gianpaolo Stocco said commercial customers are waiting for Stocco’s price in next year’s catalog.

Prices can continue to rise, but “using current prices, if they fall again, they could be out of the market in 2023,” Stocco said.

Italy’s inflation rate is 8.5%, but Stocco expects his company to experience even higher inflation next year.

He tells his customers that the price of Stokko will go up by 10 percent.

Expectations for such high inflation are bad for central banks. There is a psychological component to the future path of inflation. Higher prices can be self-fulfilling if businesses and households expect it, set higher prices, and demand higher wages accordingly.

Economists do not expect interest rates to rise in Europe, which is close to the 1980s levels when double-digit interest rates were the norm, as recession expectations increase and the window for rising interest rates narrows. However, the combination of high energy prices, high inflation, and slow economic growth has created great uncertainty for companies that cannot predict when supply chain disruptions will ease.

Cheese maker La Casearia Carpenedo expanded and invested rapidly during periods of low interest rates, installing solar panels on the roof and building machines for cleaning barrels. Over the last decade, we have spent more than € 500,000 on investment. Currently, new investments are pending, opening schools to train new cheesemakers, buying land to grow their own vines, and stopping the family’s desire to build an herb garden.

These challenges are built on existential questions that companies often ask themselves about the future of the industry.

La Casearia Carpenedo seems to have two clear options. Will you return to the producers of small craftsmen or leap into a large international company? “This is the question we are evaluating,” said Ernesto Carpenedo. But “it’s not easy to understand what will happen today and tomorrow.”

Elizabetta Poboled Contributed to the report from Rome.

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