Solvency With Tears

Just a year ago, the Italian economy looked as if it had been trampled by one of Hannibal's elephants. In March 1974, inflation was running at an annual rate of 35%, one of the worst in the industrialized world. The nation's balance of payments deficit, thrown out of kilter by quintupled oil prices, was mounting at the fearsome rate of $1 billion a month. In desperation, Italy began borrowing from other nations and sank $6 billion into debt. There was widespread speculation that the country might fall into bankruptcy--meaning that it would have to declare a moratorium on repayment of foreign debts, ban all but the most essential imports, and reconcile itself to a drastic reduction in living standards.

During the past few months, however, the Italian economy has once again demonstrated the resilience it has shown in one crisis after another since World War II. Inflation has been brought down sharply; in March, prices were rising at an annual rate of less than 1.5%. In April, the nation recorded a slight balance of payments surplus, v. a record monthly deficit of $1.2 billion in May 1974. (An earlier improvement last July proved illusory.) Last month Istituto Mobiliare Italiano, the state-owned credit institution, paid off a $250 million loan to a consortium headed by Manhattan's Morgan Guaranty Trust Co.--three months ahead of schedule. Indeed, Italy so far this year has repaid $850 million in foreign loans, including $500 million of an emergency $2 billion borrowed from West Germany when the crisis was at its worst.

The U-turn toward solvency, notes Guido Carli, governor of the Bank of Italy, "was accomplished not without tears." Specifically, the price has been a recession that during the first quarter of 1975 cut industrial production 12.3% below a year earlier and left more than 1 million Italians without jobs. But even those statistics are faintly encouraging, from a coldly economic viewpoint; they indicate that the downturn is stabilizing rather than getting worse.

David Rockefeller, chairman of Chase Manhattan Bank, has likened Italy's escape from bankruptcy to a miracle. In fact, it demonstrates an enduring quality of the nation: though its coalition governments usually seem so weak as to merit Dante's 14th century description of the country as a "ship without helmsman in a raging storm," they somehow manage to deal with economic peril. The present turnabout results from draconian measures pursued unstintingly by the government and the Bank of Italy.

Tightened Credit. High among Carli's priorities was clamping down on imports, particularly of oil and meat, thus limiting the flow of capital out of the country. To that end, the state-set price of gasoline was raised to $1.82 per gal. (from $1.14 in 1973), cutting consumption by 9%. New taxes pumped up beef prices 24%, to $3 per lb., but the desired end was achieved; the amount of meat eaten by Italians dropped 35%. By early this year, total imports had fallen 13.8% below a year earlier, while exports rose 29.2%--helped by a 20% devaluation of the lira, which is now holding steady at roughly 625 to the dollar. A fierce tightening of credit that sent bank prime rates as high as 20% or more cut deeply into new loan demand by the private sector, but freed money for paying off Italy's monumental debt. Since last June, the nation has even pulled back an estimated $2 billion of the $12 billion of capital that wealthy Italians had spirited out of the country since 1960.

Some aspects of the recovery still seem shaky. The high rate of corporate bankruptcies--1,400 in 1974 alone--shows signs of easing, but only because the government has bought control of companies that otherwise would go under because of the recession and credit squeeze. The objective seems to be to keep them in business at almost any price. Labor unions that became restive during the belt-tightening period are again pressing for hefty wage increases, threatening the competitiveness of Italian exports. Still the government, having restored Italy's international credit, now feels able to pour at least $26 billion in the next four years into the economy to revive investment that stagnated during the credit crunch. Last week the Bank of Italy cut the discount rate to private banks to 7%, from a high of 9% last December. Despite the ever-present threat of a government collapse that could add fuel to the Communist Party's bid for power, international financial experts now rate the economy as solid and ready for expansion.

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