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European Governments’ Unpaid Bills

By Marc Chandler

Over the past weekend, Italy’s caretaker cabinet formally approved plans to begin paying its overdue bills to domestic suppliers and service providers.  Its official arrears have aggravated underlying problems, such as access to credit by small and medium size businesses, who are the main creditors.  The problems of the SMEs has also contributed to the rising non-performing loans of Italian banks

For the first time, last October Eurostat published a note on the “stock of liabilities of trade credits and advances“.  These are the unpaid liabilities of governments used to purchase goods and services.  These are, incidentally are not included in the Maastricht definition of government debt.

Eurostat estimated Italy’s arrears at a little more than 67 bln euros or 4.3% of GDP at the end of 2011.  More recent estimates by central bank of Italy puts the figure closer to 91 bln euros. This would be about 5.8% of GDP and 5% of the total bank debt of Italy’s non-financial firms.  About half of the arrears are believed to be owed to health care providers and construction companies. 

The Italian government, as it were, intends to pay 20 bln euros in 2013 and another 20 bln in 2014.  There are two sources that it will draw on–issuing new securities and drawing down its deposits with the central banks.  Payment requires that the credits are certified through an electronic system, but registration by local government entities is voluntary and, as of the start of the year, only 5% of the local governments had registered.  Of note, Spain has tried a similar approach except it make the registration mandatory. 

At estimated 10% of the credits have been sold from firms to banks and other financial institutions.  These apparently are included in the Maastricht definition of government debt.  Overall, it is projected that Italy’s publish sector borrowing requirement would increase by about 2.5% this year and next.  However, Italy’s debt to GDP is projected to remain below 3% of GDP.  Of course, weaker than expected growth can lead to an overshoot.  

Relative to the size of the economy, Italy is the most egregious, but others suffer similar plights. Within the euro zone, France has the second largest arrears outstanding.  Eurostat estimates it at 67 bln euros at the end of 2011 or 3.4% of GDP.  Slovenia is in third place with its arrears amounting to 2.8% of GDP (1 bln euros).  Ireland and Portugal are next at 2.2% and 2.1% of GDP respectively (both roughly 3.5 bln euros). 

Interestingly, the October Eurostat report did not include data on Germany.  It indicated that Germany was still working on a solution to collect the data.  Austria was also reportedly developing a plan to collect the data.  This means that size of the arrears are simply not known.   

The issue of arrears indicates that the debt faced by many euro zone countries is greater than the Maastricht definition concedes.  Italy and France’s arrears are significant in absolute terms and relative to the size of their respective economies.  The full magnitude of the problem though is difficult to assess due to the difficulty in collecting the data.  In Italy, the arrears have exacerbated the credit squeeze on small and medium size businesses which dominate the economic landscape.  Addressing it may be a fairly low cost way to aid the economy.

Marc Chandler

About 

Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. In addition to frequently providing insight into the developments of the day to newspapers and news wires, Chandler's essays have been published in the Financial Times, Barron's, Euromoney, Corporate Finance, and Foreign Affairs. Marc appears often on business television and is a regular guest on CNBC and writes a blog called Marc to Market. Follow him on twitter.