The financial quarantine

23/03/20

"These are severe measures, I am aware of this: staying at home, giving up rooted habits is not easy at all, but we have no alternative. At this moment we must resist, because only in this way will we be able to protect ourselves and protect the people we love. Our sacrifice to stay home is, however, minimal when compared to the sacrifice that other fellow citizens are making. In hospitals, in places crucial for the life of the country, there are those who renounce and those who risk much more. I am thinking especially and above all of doctors, nurses; but I also think of the police, the armed forces, the men and women of the civil protection, the clerks of the supermarkets, the pharmacists, the road hauliers, the workers of the public services and also of the information services. "

Giuseppe Conte

With this preamble, the Italian Prime Minister announced, late on Saturday 21 March 2020, further restrictive measures of human activities to stem a epidemic of COVID-19 in Italy which still shows no sign of decreasing its propagation speed at the population of our country. In particular, it is stipulated that from now on only a limited number of companies and businesses, restricted to the production chains of "essential" goods and services, can remain regularly open; while all other businesses will have to remain closed.

It is now obvious, as Conte himself states towards the end of his speech, that "The health emergency, but we had foreseen it, is turning into a full economic emergency". In this article I will try to explain how, in my opinion, we must proceed to deal with this economic emergency: translating the same isolation and quarantine precautions that are already prescribed to humans in the health sector, putting the country in "financial quarantine".

In the health sector, citizenship is essentially divided into four categories: 1) the healthy, who are prescribed to limit social interactions as much as possible, so as not to get sick and continue to guarantee the survival of the country; 2) asymptomatic or mild patients, who are prescribed absolute isolation to avoid further spreading the infection; 3) the seriously ill, to whom hospital intensive care units are made available to save lives; 4) the dead, those who had, alas, a serious clinical picture even before contracting COVID-19 and therefore do not make it even with the help of intensive care.

In my opinion, to face the economic emergency, all Italian companies should be divided into the same four categories:

1) the "healthy" are all the activities that continue to operate regularly (and be regularly paid by their customers for their goods or services) even during the crisis: I think, for example, of supermarkets or pharmacies;

2) the "asymptomatic patients" are all those companies that on the one hand do not have "symptoms" because during the crisis they continue to operate and have customers who ask for their goods and services, but on the other they are still "infected" because they sell their goods or services to an audience of customers forced by their financial conditions to request payment extensions, even very long in time. Here I am thinking, for example, of banks, real estate funds and utilities which may have difficulty receiving mortgage payments, rent installments and the balance of bills from many of their customers respectively;

3) the "seriously ill" are all those companies that have been forcedly closed by government decisions. They have lost all the "breath" of their sales and must be "intubated", that is, they must receive immediate financial aid to be able to face the incompressible expenses until they can restart their business;

4) Finally, it is necessary immediately to open your eyes to the reality that some of the companies to which the government imposed the stop were already before the outbreak of this crisis in such a compromised financial situation that in all probability they will not be able to reopen at the end of this emergency.

In the absence of targeted measures for each of the four categories, the "financial contagion" could spread more or less like this: a pastry bar (our seriously ill), closed by government measures for some days, at the end of March he will be able to pay the invoice to the livestock breeding consortium (our asymptomatic patient) who supplies him with milk and cream. At that point, the farm will go into economic difficulties and will have no money to pay the trucking company (the healthy one) that provides the refrigerated trucks that bring the meat of the same farm to the neighborhood butcher shop rather than to the supermarket. At that point our food trucking company, a company that in addition to being perfectly healthy played a role of strategic importance in our society during this emergency, undergoes a perfect "financial contagion".

In order to impose on our economy that "financial quarantine" which is necessary to avoid a scenario like the one just described, the government should set up a major Liquidity and Solvency Guarantee Agency.

This agency would have the following tasks:

  • accept registrations from all Italian companies that believe they are going through a difficult time since this crisis began (presumably almost all)

  • obtain economic and financial data on the registered company. To this end, the agency should obtain immediate access not only to the tax and VAT returns of the last 3 years, but also to current account movements and to the entire electronic invoice archive involving the company entering and leaving from when electronic invoicing was introduced, with particular emphasis on recent invoices not yet paid and / or collected

  • based on a standard algorithm and published transparently, analyze the company's liquidity, profitability, debt and working capital data, comparing the values ​​of the last few days (i.e. since this crisis began) with 2019 and the average of the last 3 years

  • produce a "rating", ie a final judgment that classifies the company based on its current situation. To reconcile the practice in this field with the similarity with the health plan offered above, one could think of assigning an "A" to "healthy" companies, a "B" to "asymptomatic sick" companies, a "C" to companies " seriously ill patients ”and a“ D ”to companies that are no longer able to continue their activities at the end of this emergency

  • offer the company a personalized aid plan.

As mentioned above, the aid plan must be customized for each company. However, in general, aid should be of this type:

  • for companies "A", automatic monthly monitoring of profitability and liquidity, with the possibility of reclassifying the company monthly if the financial situation worsens

  • for companies "B", a credit limit that can be used to convert any invoice issued to a customer into cash immediately and at face value, which is difficult to collect. It is clear that to avoid abuse, the Agency should maintain an automatic daily monitoring of the company's use of liquidity. After all, the concept of "financial quarantine" is just that: the agency "isolates" company "B" from the non-payments of its customers, but in return it ensures that company "B" pays its suppliers the most regularly possible. The ceiling (as well as the entire financial situation of the company) is reviewed monthly

  • for companies that have been blocked by recent measures, and therefore they are neither "A" nor "B", the most difficult and painful choice that the Agency will have to make, based on the total budget that will be made available to it, is to classify the company as "C" or "D". To make this choice, the application of a standardized algorithm is not enough, but a more in-depth analysis is needed, which firstly involves an assessment of how "strategic" the company is for the country's economic fabric, and secondly place from a brief interview by an agency manager with the administration and ownership of the company in question, to understand the real intentions of the latter

  • if a company is classified "C" (mandatory, if it is strategic for the country; otherwise, if it had reached the crisis in an acceptable financial situation e ownership / administration is really motivated to leave once the emergency is over), the Agency administers a basket of aid which includes: 1) facilitated access to social safety nets for those workers who lose their job; 2) the possibility of declaring null supply contracts already signed (this possibility most likely requires an ad hoc legislative provision); 3) the disbursement of non-repayable loans without reporting to the Central Credit Register of the Bank of Italy. In return, the property / administration undertakes to regularly pay for the essential supplies, and to provide guarantees (including personal guarantees) regarding the restart of the company activity at the end of the emergency

  • if a company is classified as "D", facilitated and immediate access to social safety nets is expected for all employees, as well as for families that derived an economic support from that company's activity. In addition, a simplified final liquidation procedure of the company is envisaged. The reader will be asked why the classification "D" must exist in the first place, and not all companies can be saved instead. The answers are two: first, the public resources to carry out everything written in this article so far are necessarily limited, and it is not wise to use them where they would not be able to produce any satisfactory results. Second, in a mature economy like the Italian one, a "thinning out" of inefficient production capacity is necessary to speed up the recovery once the emergency phase is over.

I would like to point out that this article deals with the aid to be put in place for companies, i.e. legal entities. The theme of aid and social safety nets for natural persons, i.e. for all those who lose an income in this emergency phase (also following the measures proposed in this article), is certainly fundamental but cannot be addressed here. This theme will require an article and a separate discussion.

At this point the reader will certainly have three questions to ask me:

  1. Why do you need a new government agency to do all this? Couldn't existing banks and other financial intermediaries be used to organize this aid?

  2. What role is played by trade unions and trade associations, especially in companies of type "C" for which staff reductions are inevitable, and even more in companies of type "D" for which the death of the whole company?

  3. The most important question: where to get the money to do everything written so far?

The answer to the first question is very simple: using the banks to provide the proposed aid would be like hiring a policeman who tested positive for COVID-19 to guard the roadblock. As already written above, banks and financial intermediaries are already on their own "asymptomatic patients", as in the next few days they will be overwhelmed by a wave of suffering of frightening proportions. For this reason, if the aid were to pass through a bank before arriving at the company to be helped, the bank (which in all probability already has a credit exposure to that company) would be forced to choose between two alternatives. The first alternative would be to "balance" the aid to be disbursed with the existing exposure, with the result that the aid would remain with the bank and would not have the desired emergency function towards the company. The second alternative would be to actually get additional oxygen to the company, but at the cost of increasing the risk that the bank holds towards that company beyond prudential limits. In this second case, the "financial contagion" from serious patient (the company) to asymptomatic patient (the bank) already described above would occur from company to bank.

It is much better, therefore, that the proposed government agency provides the aid directly to the company, and that the banks eventually join the agency like all the other companies. Only in this way would the government have complete and direct control of the "occlusions" of liquidity to be unlocked in the entire Italian economy system. In addition, if the aid passes through the banking system there would inevitably be an additional report to the Risk Center of the Bank of Italy, which instead in the case of aid directly granted by the Agency proposed by me would be excluded. Finally, it is necessary to add that in order to implement the proposed Agency, a profound revision of the state aid legislation is necessary, both at national and European level.

The answer to the second question, on the other hand, is more thorny. In an emergency situation like this, it is unthinkable to set up "negotiating tables" for each company to be examined between the company, trade unions and representatives of the institutions, typical of the industrial relations system prevailing in Italy for many decades. The functioning of the proposed Agency and the decision-making process described above, as well as the urgency of the situation, require maximum speed and maximum transparency, not exhausting union negotiations. Direct involvement of trade unions and all other major social partners in the initial drafting of the operating rules is certainly desirable governance Agency; in determining the objective, verifiable and transparent criteria on the basis of which the rating of the registered company will be expressed; in the general outline of the interventions to be prescribed to companies of each rating level; and in supervising the Agency's activity on a regular basis through adequate representation on the Board of Directors of the same. On the other hand, as already mentioned, a direct involvement of the unions in the treatment of each business case is not conceivable.

Finally, finally the most important topic: how this Liquidity and Solvency Guarantee Agency should finance itself.

For about twenty years there has been a word that occasionally emerges in the public debate, like a karst stream: Eurobonds. Eurobonds are a hypothetical solidarity mechanism for distributing debts at European level through the creation of public debt obligations of countries belonging to the eurozone, to be issued by a specific agency of the European Union, whose solvency is guaranteed jointly from the Eurozone countries themselves (source: Wikipedia).

Ever since the economic emergency caused by the COVID-19 pandemic broke out in our country, extremely authoritative and transversal personalities with respect to our political landscape have given new impetus to their arguments in favor of the creation of these Eurobonds.

Instead, I would like to express, as an Italian with entrepreneurial interests concentrated in Italy and in other Mediterranean European countries, my total opposition to the introduction of Eurobonds, especially in this emergency situation. Eurobonds are in fact a controversial and divisive instrument since they would force the financially more "virtuous" Eurozone countries (typically located in the north of the continent) to take on, even partially, portions of their debt.

Whether the reader is an ardent pro-European or an inveterate sovereign, he will want to agree with me on this: if the administrator of our condominium convenes an emergency meeting while the building we live in catches fire, you and the rest of you work to find a quick, shared solution to end the fire. Do not start to raise a topic of discussion that has caused quarrels with your neighbors for 10 years now, because it would be the safest way to remain paralyzed in front of the fire, with the risk of letting everything burn.

For this reason, I propose that the Liquidity and Solvency Guarantee Agency described in this article be financed with a direct issue of money by the European Central Bank, without affecting neither the state budget nor the budget of the European Union, nor on the budget of our European partners. In this way, all the Eurozone countries, virtuous or not, and in brackets all ready to find themselves in the same emergency situation as Italy in a few weeks, will be able to copy a solution of direct intervention in support of our economies, and which refers to date to be addressed any unresolved discussion on the budget of the European Union, on the parameters of Maastricht, on the Stability Pact, etc. etc. etc.

A time will come when the emergency will be over and we will be able to divide ourselves between hawks and doves, Eurosceptics and pro-Europeans, globalists and sovereigns. If we solve this emergency thanks to new and shared solutions. Otherwise we will watch our house paralyzed burn, and in the end we will have lost everything. And we will all have lost.

Paolo Silvagni

(Economics graduate, former financial advisor, entrepreneur)

Photo: web / Online Defense / ECB