Italy's Black Hole Of Debt

Prime Minister Carlo Azeglio Ciampi's seven-week-old government has been working feverishly to straighten out Italy's battered public finances. But his efforts could be undercut by a mushrooming banking crisis connected to the troubles of the far-flung Ferruzzi empire--Italy's largest private industrial group after Fiat. Ferruzzi, Europe's biggest dealer in agricultural commodities as well as a huge producer of everything from chemicals to sugar cubes, now admits that it is unable to service its debt of almost $21 billion, much of it borrowed from five of the largest Italian banks. The Ferruzzi clan, once Italy's most powerful after the Agnellis, now says it will relinquish control of the group.

First off, Ferruzzi's black hole of debt will vastly complicate Ciampi's plans to privatize two of the biggest state-owned banks, Banca Commerciale Italiana and Credito Italiano. With around $1.7 billion in combined exposure to Ferruzzi, the banks now look a lot less attractive. Moreover, potential investors are likely to blanch at the banking system's poor record of credit assessment. The Italian banks have been hit by one disaster after another, including the $7 billion bankruptcy last year of state-owned industrial holding company EFIM and the recent $750 million restructuring of the Aga Khan's troubled Italian assets.

All this raises serious questions about Ciampi's grand plan to revamp the Italian banking system into a German-style regime, in which large banks would maintain equity positions in industrial groups. Ciampi has moved quickly to reform long-standing legislation that had forbidden such holdings. He envisions the banks' acquiring huge stakes in big business through debt-equity swaps. But it now seems preposterous to expect institutions as poorly managed as the banks to handle the restructuring of huge chunks of Italian industry.