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Total Amount of Past Dues Drop in Italy

Italian companies in 2016 showed moderate recovery, according to Euler Hermes. “As a result, the payment trend improved for all indicators analyzed in the domestic market.”

Although still relatively high, days sales outstanding (DSO) fell two days to 86. “Across Europe, however, only Greece scored worse,” according to the firm’s recently released annual nonpayments report for Italian companies in each of its regions and provinces. The study reviews several trade sectors based on daily monitoring of nonpayments over 450,000 companies.

Overdue payables also improved, down by 25%. “Nonpayments in Italy decreased both in frequency (6%) and severity (13%) compared to 2015,” Euler Hermes noted. “The value of an average domestic nonpayment in Italy is €14,000.” Business insolvencies were down 9%, but still twice as much as 2007 pre-crisis levels.

The most recent FCIB Credit & Collections Survey for Italy, conducted September 2016, attributed cultural norms and customs (27%) as the No. 1 reason for payment delays on open accounts, followed by cash flow issues and customer payment policy, both at 20%. (Member logon required to access survey results.)

“Net 30 is an actual option in Italy,” one survey respondent shared. “Have a signed credit agreement and push for it even if the sales department says it won't happen. I've been successful.”

Another credit professional finds that Italian companies are over leveraged, especially with short-term debt. “This causes cash flow issues as they eventually max out their ability to borrow to meet their obligations. They typically want to pay once monthly, and will delay payment as long as you allow them to. They view paying 30, 60, or more days beyond terms as just normal business.”

In other news on Italy, Italian banks hold 360 billion euro of nonperforming loans, Euler Hermes said. “This is the highest stock in Europe and the third highest ratio with 18% of total loans.” As a result, the firm estimates Italy’s economy loses 0.7 percentage points of GDP each year—the equivalent of 30 billion euro.


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Data Battle in India

Chris Kuehl, Ph.D.

The radical currency move undertaken by the Indian government provoked a great deal of controversy and some dire predictions as far as the state of the economy. The sudden elimination of 86% of the country’s cash overnight created immediate chaos as long lines formed at banks, and many small business operations simply shut down for lack of business. The move was designed to address the pervasive tax evasion that India has dealt with over the years. It was also an attempt to control the growth of the black market. The fact is that many governments are contemplating similar actions—even the U.S. has considered removing the $100 bill from circulation. The Indian move, however, has been criticized as being too sudden.

Critics such as former Prime Minister Manmohan Singh and Economist Amartya Sen asserted this move would reduce Indian GDP by as much as 4%. This has not happened; instead the Modi government has suggested that there has been growth. The issue now is whether to believe the data that has been coming from government sources. There are things that just don’t add up.

Some of the growth is connected to decisions by the government to expand spending with a big pay raise for employees. This was a 12% boost in spending. Many assert that this is far more than the government can really afford. This is also the time of year for the monsoon rains, which contributed to a big boost in farm income (6%). The assertion is that consumer spending went up by 10%, which is double the rate noted the month prior. The data that contradicts this observation is that private consumption at the local, small business level fell sharply as one would expect when 86% of the cash vanishes. The statistics have been manipulated in both overt and subtle ways. The growth estimates for 2015 were sharply reduced from 7.1% to 6.5%. This creates a change in the base—one that makes current growth more robust. There is also a built-in bias in economic reporting as most of the data comes from the larger companies in India. These are the companies that are not affected by changes in how cash is used. However, over half the economy is cash dependent, and this sector is not being measured at all accurately.

Then, there are the moves that companies made to cover or hide their cash assets. Many over reported sales, and others stocked up on inventory that is not needed in an attempt to account for the cash they were supposed to be reporting. The critics assert that most of this slight-of-hand will come to light in future months. Then, the expected decline will start to manifest. Meanwhile, Modi continues to try to ridicule these critics with more anti-intellectual rants. He compares his “poor” upbringing with the “Harvard and Oxford snobs.” It may well play politically, but the fact remains that wiping out 86% of a nation’s wealth is going to have real repercussions.


Germany and the Upcoming Elections

Dr. Hans Belcsák

The effect of the European Central Bank’s policies on Germany’s economic wellbeing is now coming under sharp criticism both outside and inside the federal republic. Abroad, these policies are being held responsible for having weakened the euro to the point where it—by way of booming exports—gave Germany all-time record foreign trade and current-account balance-of-payment surpluses last year, to the tune of 8.1% of gross domestic product.

Actually, this has had much to do with German engineering prowess and impressive productivity gains, and the German leadership points out correctly that it has virtually no influence on the euro’s exchange rate. But the critics, not least among them the new U.S. government, hold that the 2016 surplus in goods exchanges of EUR 252.9 billion was racked up along with a buildup of debt in other countries and, thus, poses a risk to the global economy. The German authorities have an obligation, so they say, to spend more to boost domestic demand, especially as Berlin has just posted its largest budget surplus since reunification in 1991.

At home, the complaints focus on the notion that European Central Bank policies suitable for the eurozone as a whole are too loose for Germany. They subsidize profligate Southern European governments, so one hears; force up asset prices; and accelerate inflation in general—a nasty bugbear for Germans, who still have memories of the historic destruction of money during the Weimar Republic buried deeply in their national genes. Sabine Lautenschläger, a German who sits on the ECB’s six-member executive board, may have been genuinely pleased to be able to report that eurozone inflation in January ticked up to 1.8% (German inflation was 1.7% in December, up from 0.7% in November). The ECB’s goal is to hold inflation just below 2% per annum, a target it has been undershooting since early 2013. But her, “frankly, I am delighted about that” was not well received by much of the local press, which had headlines screaming “Easy to Say If Your Wallet is Full” and “Pensioners Will Be Particularly Hard Hit.”

Most of Germany’s leading politicians have been calling for the ECB to put an end to its massive bond-purchase program known as “quantitative easing.” This is not about to happen, and the issue will be a major topic in the run-up to the federal elections on Sept. 24. All in all, the country is in fine shape economically. Real GDP growth hit 1.9% in 2016; the best gain in five years. An advance of 1.6% to 1.7% looks likely for 2017. Unemployment is at the lowest level since the start of the data series in January 1992, and the number of people at work is at its highest since reunification in 1990. Exports, too, have been hitting records, and the national minimum wage has just been hiked to EUR 8.84-an-hour from EUR 8.50. With this on her record, one might assume that Chancellor Angela Merkel should be able to cruise to a fourth term in office. But many in the federal republic have not been happy with the way things have been going. Germany today offers less social mobility and a growing inequality, they say. Many worry about job security, given the increasing prevalence of fixed-term contracts. Many view the trend toward more and more automation as threatening, and with large numbers of women working short hours on little pay, a growing proportion of the workforce is earning low wages.

This is grist for the mills of the center-left Social Democratic Party (SPD), whose recently anointed leader, Martin Schulz has made criticism of the “Agenda 2010” a focus of his rather successful efforts to lift the party’s spirits and poll ratings. A former president of the European Parliament, Herr Schulz insists that this set of labor policies, introduced by one of the SPD’s former heads (ex-Chancellor Gerhard Schroeder), has gone too far in the direction of liberalization and that a tightening-up is needed to bring social justice. The SPD also wants to raise taxes “on the rich” and delve deep into environmental issues. Under Schulz’s stewardship, the Social Democrats, who are in government in a grand coalition with Mrs. Merkel’s CDU/CSU, have gained a lot of ground. The most recent opinion polls actually give them a lead, the first in more than a decade. Mrs. Merkel, moreover, is under pressure not only from the left of the political spectrum, but also from the right. The growing force there is the Alternative Fuer Deutschland (Alternative for Germany or AfD), a right-wing, Eurosceptic party that has seen its popularity surge in opposition to the Chancellor’s liberal refugee policies.

The AfD’s populist platform appears to have secured it a place in the Bundestag (support has jumped from 4.7% in the 2013 elections to 12%-15% now). Still, it will not be able to nudge Chancellor Merkel from her strong pro-EU position and her defense of open borders, globalization and international trade. She will hold fast in principle, although there is now public concern in many corners about the influx of 1.2 million migrants who are proving difficult (and in many cases unwilling) to integrate, and the chancellor has just issued a 16-point plan to modify her approach. The SPD does not share the AfD’s anti-refugee stance either, judging from Mr. Schulz’s remark that the Alternative is “a disgrace to the federal republic,” and it is “shameful and repugnant” when “rat-catchers are trying to make political capital on the backs of the refugees.” When all is said and done, Chancellor Merkel’s chances of winning a fourth term at the helm of the CDU/CSU are still pretty good, assuming that there will be no further, major terrorist incident in Germany between now and September.

But Mr. Schulz and the SPD appear to have at least an outside chance of bumping her from her position if they keep gaining ground the way they have been doing. It is significant in this context that Frank Walter Steinmeier, the former foreign minister and a top SPD figure, has just been elected as Germany’s new president (a largely ceremonial post, but not quite as powerless as it may appear at first glance). To be sure, even if the SPD came in first in the fall elections, it would almost certainly lack an overall majority and have to forge a coalition with other parties to be able to govern. This could mean a renewal of the grand coalition with the CDU/CSU, but with the SPD in charge for the first time, or an attempt to build a center-left government with the Greens and the far-Left Party. Quite possibly, in such an event, the incoming government would be composed of three different parties, something Germany has not experienced before at the national level. But Berlin’s commitment to the European Union, and the euro will remain strong either way.

Election Calendar

March 7 – Federated States of Micronesia, Congress

March 15 – The Netherlands, Second Chamber

March 20 – Democratic Republic of Timor-Leste, President

April 2 – Ecuador, President

April 9 – Serbia, President

April 23 – France, President

May 19 – Iran, President

Global Roundup

Le Pen lays out platform for French economy. French far-right presidential candidate Marine Le Pen envisions the protective hand of the state guiding a reordered economy that punishes companies that fail to serve the interests of the nation and rewards those that put France first. The nationalist policies include a tax of up to 35% for French companies that produce their goods elsewhere and then re-import them. Companies that respect the made-in-France label end to end would be compensated. (New York Times)

China bankruptcy cases surge as economy slows. Bankruptcy cases reportedly have surged in China as a sign of mounting economic stress. Chinese courts accepted 5,665 bankruptcy cases in 2016, up 54% from the year before, the country's top court said on Feb. 24. About 3,600 of those cases were resolved, with 85% of the resolved cases resulting in liquidation. (Newsmax)

Canada’s free trade agreements strategy. With the Trans-Pacific Partnership at a stumbling block, it’s not surprising that many trade experts are looking to the Regional Comprehensive Economic Partnership (RCEP) as an alternative. While Canada has not issued a policy highlighting its priorities and a clear direction on its free trade agreement priorities, it is actively committed to negotiating trade agreements with some of the key countries in the Asia region. Canada’s interest in the RCEP remains unclear. (Global Trade Magazine)

A battle for the Supreme Court begins in Brazil. In early January, Supreme Court justice Teori Zavascki died under somewhat mysterious circumstances in a plane crash. Brazil’s President Michel Temer has nominated Justice Minister Alexandre Moraes—a close ally to Temer—as his replacement. The nomination of political aides is not without precedent in Brazil, but the nomination is proving controversial due to the country’s ongoing corruption scandal. (Global Risk Insights)

Sinn Fein enjoys vote surge in Northern Ireland election. Sinn Fein enjoyed a potentially historic surge in support Friday as ballots were counted for seats in the Northern Ireland Assembly, a contest triggered by the Irish nationalist party in a bitter showdown with its longtime Protestant partners in government. At stake in the outcome from Thursday's snap election is the revival or demise of power-sharing between Irish Catholics and British Protestants, the central objective of the British territory's 1998 peace accord. (US News & World Report)

Swift innovates on global payments, without blockchain. Twelve transaction banks are now live with Swift’s new global payments innovation (gpi) service. The launch marks a “major milestone” in innovating cross-border payments, the company says, albeit the service does not incorporate blockchain technology. After months of testing, global transaction network Swift has announced that its new gpi service has opened for live payments between 12 banks across 60 countries, with many more set to adopt the service in May. (Global Trade Review)

China's Central Bank faces a delicate balancing act. China’s central bank faces a dilemma: whether to raise borrowing costs and potentially undermine the nascent economic recovery, or hold firm and risk spurring capital outflows as Federal Reserve policy tightening cuts into the country’s interest-rate advantage. (Bloomberg)

Costs climb as companies move to mitigate supply chain interruptions. Some 70% of companies have experienced at least one supply chain interruption during the past year, with an unplanned IT or telecommunications outage the leading cause, according to the eighth edition of the Business Continuity Institute’s (BCI) Supply Chain Resiliency Report, produced in association with Zurich Insurance Group. Covering 526 respondents in 64 countries, the report studies the causes, costs and frequency of such events while also looking at companies’ progress in responding to supply chain interruptions and mitigating further occurrences. (Risk Management Monitor)


Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations