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A new Mediobanca for small and medium-sized enterprises

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Mediobanca was established by Mattioli and Cuccia in 1946, immediately as a joint stock company, and its full name was Mediobanca Banca di Credito Finanziario. It operated from the beginning having, as founding partners, Banca Commerciale, of which Raffaele Mattioli was President at the time, and Credito Italiano.

Enrico  Cuccia  was  an  unsurpassed  analyser  of  balance  sheets  and accounts – in fact, one of his best known witty remarks was the one on Berlusconi’s Fininvest: “Indeed, how much is a TV antenna really worth?” He was General Manager of Mediobanca from its foundation until 1982, when the dual crisis of public and private companies and of the banks that supported them could already be perceived.

What was the logic behind the establishment of this particular financial structure?

Simply to guarantee and meet – in the medium and sometimes long and very long term –   the economic needs of the manufacturing companies, which had been devastated by World War II.

After the banking reform of 1936, of which Mattioli and Cuccia’s father- in-law, Alberto Beneduce, had  designed the  general guidelines –  later imitated in many financial laws following the 1929 crisis, also in the USA- there were many banks that had chosen to operate in the traditional market of savings collection and then in the short-term credit market.

There was, therefore, the lack of a specialized financial structure which worked only for companies, funded them in the medium-long term and finally led them – where possible – to be listed on the Stock Exchange.

At the time, legislation clearly separated credit and savings banks from those that operated for companies and led them to the listed on the Stock Exchange.

It was the most rational way to separate companies from banks, so as to avoid companies’ crisis leading to the death of public savings.

Enrico Cuccia, who certainly did not like the Italian ruling class, except for his friend and old banker Ugo La Malfa, kept Mediobanca clearly out of the many pressures coming from the whole political world.

However, particularly from 1982 onwards, Cuccia had to face very strong tension with the Institute for Industrial Reconstruction (IRI) – at the time led by Romano Prodi – that forced the three banks of national interest, namely Banca Commerciale, Banca di Roma and Credito Italiano – which were all within the IRI sphere – not to renew Enrico Cuccia’s term of office.

Nevertheless, there was another factor that led to the inevitable transformation of Mediobanca.

The 1993 Banking Law, in fact, abolished the obligation for banks to be specialised – hence the separation between savings banks and financial credit institutions for medium-long term companies – and a real crisis occurred between the banks participating in the shareholding structure of Mediobanca and the old medium-long term credit institution.

The central idea underlying the 1936 Law, however, was not entirely wrong, even though it was no longer comprehensible in the context of financial globalization.

Either the banks are separated from their clients or the likelihood of a parallel collapse increases disproportionately.

Moreover, the Consolidated Law of the then Prime Minister Giuliano Amato, i.e. the 1993 reform law, put an end to the structural division between banks and anticipated by six years the end of the U.S. Glass- Steagall Act which, in essence, resumed the principles of separation between banks and companies enshrined in the Fascist Banking Law of 1936.

Currently, in Italy alone, 200 billion euros are needed within the next 18 months in view of resuming the path of development and even of mere productive stability, apart from the E.U. governments’ initiatives – albeit necessary – to face the impact of the Covid-19 pandemic.

This is the extent of a complete post-war reconstruction. With a view to solving these specific problems, the States have always resorted to forms of extraordinary debt – as was the case with the traditional War Bonds – which are bearer financial instruments with a lower average income than the standard ones, but have a long duration ranging between 7 and 15 years.

Nowadays, however, the securities market is very complex and structured, but we could also envisage a monthly issue of 15-20 year Italy Bonds – a market that is already very large and currently appreciated by savers – with a  1.5-2%  constant  coupon,  the  same  as  the  current  BTPs,  obviously exempt from all present and future taxes, but with a tax credit – if anything – for corporate or retail customers equal to or even higher than the coupon (for example a 3-4% tax credit).

The SMEs’ crisis, however, has been worsened by the COVID-19 pandemic and the necessary lockdown of many companies and craft businesses.

Just think that the Italian small and medium-sized enterprises account for over 90% of the total number of companies –  and I am referring to those with less than 20 employees – but receive only 13% of bank loans.

In 2019 there was the biggest drop in loans to SMEs as from 2015.

If we look at the Bank of Italy data processed in early 2020, it turns out that credit to riskier SMEs – calculated on the basis of CERVED criteria – has fallen by 8% for micro-enterprises, but the rating and the amount of bank loans available also for the “safest” SMEs have decreased.

In the meantime, bank loans have increased throughout the Eurozone by 3.7% in continental Europe – hence also in Italy, although only by 3% – with a rate of five percentage points lower in Italy than the trend currently recorded in the rest of the European Union.

A credit crunch for the Italian smaller companies, which makes them very weak, often unable of achieving good globalization, and also inevitably slow in renewing their cutting-edge technologies, but finally prone to the cycle of their short term and loan capital.

One of the reasons for this structural weakness of the Italian SMEs’ finance is, on the one hand, the fact that they have no access to the debt market, with the issuing of bonds or mini-bonds, but, on the other hand, the real European regulatory jungle, which is aimed at reaching one single goal, i.e. to severely lower the credit risk for banks.

All E.U. regulations in the banking sector tend not to grant credit at all to the weaker and smaller SMEs and to consider the usual non-performing loans of companies only as an immediate prelude to bankruptcy.

If we had behaved like this during the huge economic boom of the 1960s, we would still have the rubble of World War II in our major cities.

If a bank follows the completely risk-averse behaviour of a traditional insurance company, then it might as well change business.

Furthermore, the new E.U. regulations in the offing, regarding the regular provision of bank loans to companies and households, are even stricter and more stringent than the international ones – hence money is lent only to those who basically do not need it.

Not to mention the regulations known as Basel II, i.e. the International Convergence of Capital Measurements and Capital Standards developed by the “Basel Committee” established within the Bank for International Settlements (BIS), located in the big tower overlooking the centre of the Swiss city.

Ironically, the BIS was created in 1930 to manage the implementation of the Young Plan, the ingenious and very modern financial operation that cut the war debt of defeated Germany by 20%, dividing it into instalments to be paid every 58 years, with the last one paid in 1988, one year before German reunification.

Unlike this brilliant idea of debt repayment, which was developed in the 1920s, the Basel II regulations, which came into force in 2007, have only one obsessive goal, i.e. to make the banking system stable and radically reduce the companies’ credit risk vis-à-vis the system itself.

In some years after the Basel II regulations, the reduction in loans to companies, and in this case also to large companies, was even 3.5% on average.

It should also be recalled that the Basel III regulations have been in action since January 2013, becoming fully operational in January 2019.

According to the latest data from the Bank of Italy, the decrease in loans to SMEs ranges between 1.9 and 2%.

The estimate is made on the basis of already largely insufficient data.

Furthermore, the weight of bank loans on Italian corporate balance sheets, both of SMEs and large companies is, on average, over 60% of total debt.

In Germany, the United Kingdom and France the bank debt burden on total corporate debt is around 50%.

Hence, if the companies themselves do not take risks on their own and tend to be not only risk averse but also focused on unproductive income, also the banks tend to protect themselves more than usual and even more than it happens with the Basel III regulations.

Hence companies’ low capitalization, but also naive, excessive and bureaucratic formalism of banks, which often forget that their business is to  sell  money  and,  when  giving  information,  put  together  national, European and international standards that, in addition to Basel III regulations, also include the IRFS 9,  created in  2014 to improve and standardize financial information.

Finally, the Italian SMEs pay much more for loans than their competitors because the risk analysis procedure is much more formalized, legalized, bureaucratic and very strict, while the German and French banks serve their business clients in a much more flexible way.

The guarantees are almost always the applicant’s personal ones. This is not even provided for in the various Basel regulations. The rates of access to credit in other European countries are 2-3%, with Italy that, for a low rating company, even goes so far as to charge a 7-8% yearly interest rate.

It should be recalled that currently 92% of Italian companies are micro- enterprises and SMEs, with five and a half million VAT numbers. The average turnover of all these micro-enterprises and SMEs does not exceed two million euros per year.

In France, Germany and Great Britain, the number of entrepreneurs is half of the Italian ones. In France, however, 75% of companies –  which are not SMEs, but medium-sized and large enterprises – are concentrated around Paris, while in Germany – despite the E.U. regulations do not accept it – the banking network is still in the hands of the Länder and of KfW – the equivalent of the Italian investment bank “Cassa Depositi e Prestiti” – which supports all banks in crisis, again in defiance of E.U. regulations.

The bank rating is primarily public, i.e. that of the companies specialised in the sector – which, in Italy, are controlled by CONSOB – and the SMEs often cannot afford to pay large sums of money to the rating companies and also wait for a long time before the rating is made official.

The non-official rating that, instead, Italian banks often adopt is – so to speak – “private”. It is above all the software that the Bank of Italy makes available to banks to evaluate the companies’ balance sheets and accounts, always based on the principle explained by a great and well-known Italian entrepreneur: “the first balance sheet is for everyone and is submitted to the banks; the second one is seen only by company managers and is not made public; the third is very confidential and is seen only by the CEO and the main shareholder, who never speak about it”.

The Bank of Italy’ software studies companies according to a geo-sectoral criterion and following the past trends only of the sector to which they belong.

If the rating turns out to be negative – as is often the case in a phase of crisis and in “mature” sectors, where many SMEs still operate – the bank offers them an 8% interest rate, which is completely off-market, or – as often happens –  does  not grant them any  loan, thus  making them go bankrupt.

Therefore, also the SMEs must be equipped with a “language” suitable for banking procedures, good accounting tools, such as business plans and management budgets, as well as fintech tools, such as business analysis and professional creditworthiness assessments.

At least initially, this could break the wall of incommunicability that separates the business banking clients from the banks’ way of thinking or not thinking at all.

What could be a possible alternative? The private capital market. In Italy there are 1,375 billion euros of private savings which could be invested productively.

In France and Great Britain, the investment in start-ups is on average, year after year, 2.5 billion euros. In Italy it is worth 160 million euros.

The Prime Minister’s Decree known as “Curaitalia” has established the Guarantee Fund for SMEs, which also provides for long-term operations (over 36 months).

However, will the Guarantee Funds and the Credit Consortia be enough to ensure credit flows to SMEs? I do not think so.

According to the latest data, the Credit Consortia have a very low risk profile. They are currently 34 and are subject to the supervision of the Bank of Italy.

In 2019 they issued guarantees to the tune of 7.3 billion euros. Hence, once again, they are not sufficient.

Therefore, we officially propose the establishment of a Medium-Long

Term Credit Bank dedicated to small and medium-sized enterprises.

You can have access to it with the same criteria as an ordinary industrial credit bank, which can lead the most promising SMEs to be listed on the

Stock Exchange or can possibly organize an effective market for the mini- bonds issued by any small and medium-sized enterprise.

Ordinary credit banks or, even better, industrial credit banks and companies can be shareholders of our Mediobanca for SMEs. It can also have its own research unit developing analysis and risk profiles for its clients. It can issue debt and credit securities on the market and can also take part in merger, acquisition and expansion operations in foreign markets.

Hence a Mediobanca model specifically adapted to suit Italian SMEs.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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Economy

The Covid After-Effects and the Looming Skills Shortage

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coronavirus people

The shock of the pandemic is changing the ways in which we think about the world and in which we analyze the future trajectories of development. The persistence of the Covid pandemic will likely accentuate this transformation and the prominence of the “green agenda” this year is just one of the facets of these changes. Market research as well as the numerous think-tanks will be accordingly re-calibrating the time horizons and the main themes of analysis. Greater attention to longer risks and fragilities is likely to take on greater prominence, with particular scrutiny being accorded to high-impact risk factors that have a non-negligible probability of materializing in the medium- to long-term. Apart from the risks of global warming other key risk factors involve the rising labour shortages, most notably in areas pertaining to human capital development.

The impact of the Covid pandemic on the labour market will have long-term implications, with “hysteresis effects” observed in both highly skilled and low-income tiers of the labour market. One of the most significant factors affecting the global labour market was the reduction in migration flows, which resulted in the exacerbation of labour shortages across the major migrant recipient countries, such as Russia. There was also a notable blow delivered by the pandemic to the spheres of human capital development such as education and healthcare, which in turn exacerbated the imbalances and shortages in these areas. In particular, according to the estimates of the World Health Organization (WHO) shortages can mount up to 9.9 million physicians, nurses and midwives globally by 2030.

In Europe, although the number of physicians and nurses has increased in general in the region by approximately 10% over the past 10 years, this increase appears to be insufficient to cover the needs of ageing populations. At the same time the WHO points to sizeable inequalities in the availability of physicians and nurses between countries, whereby there are 5 times more doctors in some countries than in others. The situation with regard to nurses is even more acute, as data show that some countries have 9 times fewer nurses than others.

In the US substantial labour shortages in the healthcare sector are also expected, with anti-crisis measures falling short of substantially reversing the ailments in the national healthcare system. In particular, data published by the AAMC (Association of American Medical Colleges), suggests that the United States could see an estimated shortage of between 37,800 and 124,000 physicians by 2034, including shortfalls in both primary and specialty care.

The blows sustained by global education from the pandemic were no less formidable. These affected first and foremost the youngest generation of the globe – according to UNESCO, “more than 1.5 billion students and youth across the planet are or have been affected by school and university closures due to the COVID-19 pandemic”. On top of the adverse effects on the younger generation (see Box 1), there is also the widening “teachers gap”, namely a worldwide shortage of well-trained teachers. According to the UNESCO Institute for Statistics (UIS), “69 million teachers must be recruited to achieve universal primary and secondary education by 2030”.

From our partner RIAC

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Accelerating COVID-19 Vaccine Uptake to Boost Malawi’s Economic Recovery

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Lunzu market in southern Malawi. WFP/Greg Barrow

Since the onset of the COVID-19 pandemic, many countries including Malawi have struggled to mitigate its impact amid limited fiscal support and fragile health systems. The pandemic has plunged the continent into its first recession in over 25 years, and vulnerable groups such as the poor, informal sector workers, women, and youth, suffer disproportionately from reduced opportunities and unequal access to social safety nets.

Fast-tracking COVID-19 vaccine acquisition—alongside widespread testing, improved treatment, and strong health systems—are critical to protecting lives and stimulating economic recovery. In support of the African Union’s (AU) target to vaccinate 60 percent of the continent’s population by 2022, the World Bank and the AU announced a partnership to assist the Africa Vaccine Acquisition Task Team (AVATT) initiative with resources, allowing countries to purchase and deploy vaccines for up to 400 million Africans. This extraordinary effort complements COVAX and comes at a time of rising cases in the region.

I am convinced that unless every country in the world has fair, broad, and fast access to effective and safe COVID-19 vaccines, we will not stem the spread of the pandemic and set the global economy on track for a steady and inclusive recovery. The World Bank has taken unprecedented steps to ramp up financing for Malawi, and every country in Africa, to empower them with the resources to implement successful vaccination campaigns and compensate for income losses, food price increases, and service delivery disruptions.

In line with Malawi’s COVID-19 National Response and Preparedness Plan which aims to vaccinate 60 percent of the population, the World Bank approved $30 million in additional financing for the acquisition and deployment of safe and effective COVID-19 vaccines. This financing comes as a boost to Malawi’s COVID-19 Emergency Response and Health Systems Preparedness project, bringing World Bank contributions in this sector up to $37 million.

Malawi’s decision to purchase 1.8 million doses of Johnson and Johnson vaccines through the AU/African Vaccine Acquisition Trust (AVAT) with World Bank financing is a welcome development and will enable Malawi to secure additional vaccines to meet its vaccination target.

However, Malawi’s vaccination campaign has encountered challenges driven by concerns regarding safety, efficacy, religious and cultural beliefs. These concerns, combined with abundant misinformation, are fueling widespread vaccine hesitancy despite the pandemic’s impact on the health and welfare of billions of people.  The low uptake of COVID-19 vaccines is of great concern, and it remains an uphill battle to reach the target of 60 percent by the end of 2023 from the current 2.2 percent.

Government leadership remains fundamental as the country continues to address vaccine hesitancy by consistently communicating the benefits of the vaccine, releasing COVID data, and engaging communities to help them understand how this impacts them.

As we deploy targeted resources to address COVID-19, we are also working to ensure that these investments support a robust, sustainable and resilient recovery. Our support emphasizes transparency, social protection, poverty alleviation, and policy-based financing to make sure that COVID assistance gets to the people who have been hit the hardest.

For example, the Financial Inclusion and Entrepreneurship Scaling Project (FInES) in Malawi is supporting micro, small, and medium enterprises by providing them with $47 million in affordable credit through commercial banks and microfinance institutions. Eight months into implementation, approximately $8.4 million (MK6.9 billion) has been made available through three commercial banks on better terms and interest rates. Additionally, nearly 200,000 urban households have received cash transfers and urban poor now have more affordable access to water to promote COVID-19 prevention.

Furthermore, domestic mobilization of resources for the COVID-19 response are vital to ensuring the security of supply of health sector commodities needed to administer vaccinations and sustain ongoing measures. Likewise, regional approaches fostering cross-border collaboration are just as imperative as in-country efforts to prevent the spread of the virus. United Nations (UN) partners in Malawi have been instrumental in convening regional stakeholders and supporting vaccine deployment.

Taking broad, fast action to help countries like Malawi during this unprecedented crisis will save lives and prevent more people falling into poverty. We thank Malawi for their decisive action and will continue to support the country and its people to build a resilient and inclusive recovery.

This op-ed first appeared in The Nation, via World Bank

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An Airplane Dilemma: Convenience Versus Environment

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Mr. President:  There are many consequences of COVID-19 that have changed the existing landscape due to the cumulative effects of personal behavior.  For example, the decline in the use of automobiles has been to the benefit of the environment.  A landmark study published by Nature in May 2020 confirmed a 17 percent drop in daily CO2 emissions but with the expectation that the number will bounce back as human activity returns to normal.

Yet there is hope.  We are all creatures of habit and having tried teleconferences, we are less likely to take the trouble to hop on a plane for a personal meeting, wasting time and effort.  Such is also the belief of aircraft operators.  Add to this the convenience of shopping from home and having the stuff delivered to your door and one can guess what is happening.

In short, the need for passenger planes has diminished while cargo operators face increased demand.  Fewer passenger planes also means a reduction in belly cargo capacity worsening the situation.  All of which has led to a new business with new jobs — converting passenger aircraft for cargo use.  It is not as simple as it might seem, and not just a matter of removing seats, for all unnecessary items must be removed for cargo use. They take up cargo weight and if not removed waste fuel.

After the seats and interior fittings have been removed, the cabin floor has to be strengthened.  The side windows are plugged and smoothed out.  A cargo door is cut out and the existing emergency doors are deactivated and sealed.  Also a new crew entry door has to be cut-out and installed. 

A new in-cabin cargo barrier with a sliding access door is put in, allowing best use of cargo and cockpit space and a merged carrier and crew space.  A new crew lavatory together with replacement water and waste systems replace the old, which supplied the original passenger area and are no longer needed.

The cockpit gets upgrades which include a simplified air distribution system and revised hydraulics.  At the end of it all, we have a cargo jet.  If the airlines are converting their planes, then they must believe not all the travelers will be returning after the covid crisis recedes.

Airline losses have been extraordinary.  Figures sourced from the World Bank and the International Civil Aviation Organization reveal air carriers lost $370 billion in revenues.  This includes $120 billion in the Asia-Pacific region, $100 billion in Europe and $88 billion in North America.

For many of the airlines, it is now a new business model transforming its fleet for cargo demand and launching new cargo routes.  The latter also requires obtaining regulatory approvals.

A promising development for the future is sustainable aviation fuel (SAP).  Developed by the Air France KLM Martinair consortium it reduces CO2 emissions, and cleaner air transport contributes to lessening global warming.

It is a good start since airplanes are major transportation culprits increasing air pollution and radiative forcing.  The latter being the heat reflected back to earth when it is greater than the heat radiated from the earth.  All of which should incline the environmentally conscious to avoid airplane travel — buses and trains pollute less and might be a preferred alternative for domestic travel.

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