Ask me what is the most relevant reform that our Prime Minister Monti could implement at no cost, actually at a positive gain, in the next few days.
Well, to answer that, you should know that the Italian public sector pays its creditors (firms that participate to its public procurement tenders where it buys goods, works and services) with an average 8 month delay, while the law requires payment in 1 month. Scandalous right?
Not only scandalous, suicidal. Many firms can’t wait 8 months for payment, because they don’t have access to credit lines to finance their operations in the meantime. These discouraged firms don’t participate to the tenders of the public sector, which are thus less competitive. In turn this lower competition raises the costs of purchasing by the public sector, and our taxes. Some firms are not discouraged because they can borrow. But these borrowing costs are transferred in the price offered to the public entities, so it once more raises costs.
This debt of 8 month average duration (called commercial debt) amounts to approximately 4% of Italian GDP. Huge amount that would change the life of strangled firms if paid on the time, giving a boost to growth and competition in the Italian economy.
So what could be done? Easy enough. Make it mandatory from now on o pay in 1 month time. Easier said than done. But most of all, pay back immediately that 4% of debt outstanding. It would feel to firms like an injection of liquidity that they do not seem to receive from banks nowadays. Essential.
Well the simplest way to pay back this debt would simply be to borrow this 4% of GDP at market rates by the issuance of (for example long-term) marketable bonds and transfer the amount so raised to creditor firms. Total debt would remain stable, but growth would be restored.
Wait a second. We seem to be unable to do it. Why? Oh, here comes Europe (and Italy) nightmare rigidity and bureaucracy for you. It turns out that commercial debt is not considered in official statistics. So if we were to swap this debt in a “marketable debt” all of a sudden it would appear in our statistics and everybody would notice the terrible debt to GDP ratio rising by 4% in a few seconds. No, this can’t happen, says the bureaucrat, markets would tremble and raise the spread on Italian bonds! Nonsense. Markets are already aware that the Italian public sector owes this money because of late payments and has long ago embedded this in its evaluation of Italian sovereign debt. Nothing would happen to market rates the minute this “swap” is announced.
Actually, I take it back. One thing would indeed happen. Markets would be so astonished to
see Italian politicians finally doing something positive for the economy and its growth potential that spread would go down immediately. Yes down, not up.
So what would it take? Some courage from our politicians. We trust Mr. Monti, who knows the machine of Brussels quite well, will make this dream come true, by pounding his fist against the table and reminding everyone that we can’t allow misplaced accounting fears contribute to the collapse of Europe.