View from City Road: Meddling with Italy

With the Italian government on its last legs, the lira weakening and the entire population apparently feeling a burning sense of grievance against corrupt politicians, it is hardly surprising that financial markets are looking askance at the country's debt. Last month Moody's, the US credit rating agency, put Italy's rating under review again.

Into this messy situation, which has already made it more difficult for Italy to borrow on international markets, the European Commission has lobbed a bombshell. It has written to the Italian government objecting to plans to repay foreign bank creditors of the failed state-owned industrial group Efim. The reimbursement, it says, may have been an illegal state subsidy. Italy could land in the European Court if it repays the banks.

When Efim went into liquidation, Italy initially offered bank creditors 80 per cent repayment on the grounds that the group had only an implied public-sector guarantee. The banks threatened a loan strike and the government backed down. Despite the commission letter, it will pay in full, starting next month.

It argues that under Italian law, as sole shareholder, it was responsible for Efim's debts when it went into liquidation. But the Commission claims the government was not acting as a normal shareholder when it arranged to restructure Efim with a cash injection, a write-off of debts and a repayment to bank creditors.

A Commission spokesman said Efim's ownership was not the issue, since the rules were the same for state and private companies. The question was whether the state was behaving as a 'wise investor', or giving aid. If state money is used to support a company in liquidation, it argues that must be illegal aid by definition - since a market investor would not put money into a failed firm.

If the Commission is upheld, Italian state companies will find it hard to borrow since state guarantees would prove illusory. Indeed, the repercussions could be felt by state companies - and their creditors - throughout the EC. But it is hard to see repayment to foreign creditors as having any effect on competition in Efim's markets. The over-zealous Commission is meddling again.