Planning a bailout? Italy shows the way

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By Jo Winterbottom (Reuters)

 Italy may have earned a bad name for changing the rules to rescue its corporations, but in these straitened times Prime Minister Silvio Berlusconi's bespoke bailout of airline Alitalia puts him in illustrious company.

Manoeuvres like last month's change to Italian bankruptcy law for companies providing a public service, and suspension of antitrust rules, have typically won scant approval from the international investing community.

Italian government bonds yield about 70 basis points more than German paper, one of the highest risk premiums in the euro-zone. According to the IMF, Italy attracted about $40 billion in new foreign direct investment in 2007, equivalent to 1.9 percent of GDP. That compares with about 5.8 percent of GDP for France and 4.2 percent of GDP for Spain.

But where before the credit crunch, the rallying cry championed by financial powers led by the United States was a market-led government-light pursuit of profit, now in other economies struggling with the disconnection in credit markets, pressure is mounting on governments to intervene.

"What has been done for bailing out Alitalia is a slap in the face of all free-market, rule-of-law, separation-of-powers norms and practices," said Carlo Alberto Carnevale-Maffe, a professor at Bocconi University's business school.

"But it is widely popular. In bad times of uncertainty, nation-states provide quick and cheap (so to say) reassurance to the disoriented many."

The risk for Italy was not systemic — like that faced by the U.S. government in seizing control of mortgage finance companies Fannie Mae and Freddie Mac in what could be its biggest ever bailout.

And Italy is not alone in acting unilaterally to preserve perceived strategic interests. France stepped in to help once-struggling engineering firm Alstom, Britain rescued building society Northern Rock and even the United States was accused of protectionism for warding off Dubai's DP World from its port terminals.

But Italy's government, which owns 49.9 percent of the floundering carrier, did act radically: it changed the laws to set up the rescue by a group of Italian investors, after a sale to Air France-KLM failed.

BUSINESS-FRIENDLY

The deal is one of a line of corporate rescues pulled together with clever rule changes by Italy's political and financial elite, fulfilling an election pledge from Berlusconi to find Italian buyers for a carrier no-one seemed to want.

The country's previous major rescue came at the end of 2003 when food group Parmalat — a household name for its long-life milk — collapsed under the weight of 14 billion euros in debt.

It was another Berlusconi administration that changed the laws then, speeding up the insolvency process and giving administrator Enrico Bondi nine months to put a new strategy together instead of the previous 60-day deadline.

This time around, a group of executives led by Roberto Colaninno, who in 1999 championed Olivetti's leveraged buyout of Telecom Italia and later brought Vespa scooters back into the black, submitted an offer after the rules were changed for just the best bits of Alitalia — likely to include slots, planes and partnerships.

News media may smart on the taxpayers' behalf — commentator Eugenio Scalfari in an editorial for La Repubblica called the Alitalia deal a "typical case of nationalising the debt and privatising the profit".

The carrier had already had a 300 million euro cash injection from the government, which the European Commission could end up considering illegal state aid.

But the EU's transport commissioner Antonio Tajani — a former spokesman for Berlusconi — has already said Brussels has no option but to view the rescue positively.

International bankers are not complaining.

"Italy is and remains a country open to investment," said Sergio Ascolani, head of banking for Citigroup in Italy, in the wake of the Alitalia rescue. Citigroup was adviser to Alitalia while it was discussing the Air France deal.

"The changes to the previous law were needed and they made it more flexible," said Ascolani. "Of course, legislative uncertainty never helps. But the actual situation is alright even if there's room for improvement."

Italy's global ranking in a World Bank report this week on the ease of doing business slipped to 65th from 59th — well behind the United States and Britain. But it was praised for expanding creditors' rights to let distressed companies seek a deal without declaring bankruptcy.

"The solution from the point of view of … decree laws, talks, antitrust, protection of shareholders and so on, seems to me excellent," said Oliviero Baccelli, professor at Milan's Bocconi University and vice-director at transport research centre CERTeT.

"Now we need clarity on the industrial plan," he added.

PRIVATE PROFIT, PUBLIC PAIN

Many of the investors lined up for Alitalia have businesses working with the government, which has led to speculation they could gain political benefits for helping out.

Looking at the list of businessmen, "you won't find a single one that isn't waiting for pretty lucrative government favours," wrote Alberto Statera in newspaper La Repubblica.

Consumer groups and competitors complain that Alitalia's dominant position after the rescue deal could restrict choice and lead to "extremely high" fares.

The government crimped antitrust powers so the carrier's future dominance of the lucrative route from the financial capital Milan to Rome would not be a problem.

"It's right to wonder how on earth there can be any important national economic interest in allowing the new Alitalia to retake a dominant position on national routes," said economists on the respected lavoce.info Web site.

More pain for the public could come if the government has to cope with layoffs for around 3,000 airline employees or doles out compensation to them, as well as assuaging small shareholders and Alitalia's creditors.

"I don't think Alitalia changes the relationship of Italy to the rest of Europe for investment," said Simon Goodfellow, strategist at ING in London, noting that management of European airlines has long reflected political concerns.