Italy after Parmalat: Spilt milk

Date: 07/02/04

The fallout from Parmalat may be costly

UNUSUALLY, for an Italian scandal, Parmalat has so far had little political resonance. Most voters accept the argument of Silvio Berlusconi's government that it has nothing to apologise for. The company's founder, Calisto Tanzi, and his executives began burying the firm's debts long before Mr Berlusconi came to office. Anyway, politicians cannot fairly be held responsible for outright fraud.

What political links have emerged implicate the old system that Mr Berlusconi claims to have replaced. Leaked transcripts show that Parmalat's former chief financial officer, Fausto Tonna, told prosecutors that some of Parmalat's huge debts - now put at €14 billion ($17.5 billion) - were incurred because Mr Tanzi did costly favours for Christian Democrat bigwigs. Mr Tonna said that Mr Tanzi agreed several times to buy stricken firms whose collapse would have inconvenienced his political friends.

Parmalat nevertheless stands to affect more than a few half-forgotten politicians. Last month, the finance minister, Giulio Tremonti, said the affair would cost the state about €11 billion. That would offset almost exactly the sacrifices the government made last year to cut the budget deficit. But the indirect effects may be even bigger. The image of Italy, and of some its most respected institutions, is in peril.

The Bank of Italy, one of the country's few revered and uncorrupt public bodies, is on the defensive over government plans to remove its regulatory powers over banks and other financial agencies. Italy's feared revenue police are looking into Mr Tonna's claim that his boss could fix the dates of supposedly random tax inspections. This week the very prosecutors probing Parmalat came under a cloud, when the leader of one investigation, Giovanni Panebianco, resigned after being charged with corruption.

Leaks from the inquiries portray a business culture rooted in ties of blood and friendship, peopled by uninquisitive accountants and bankers and held together by a web of reciprocal favours. Attempts have been made to dismiss Mr Tanzi as a dinosaur: a rare survivor from an earlier age of family-based Italian capitalism. That would be more convincing if an apparently similar, if smaller, scandal had not erupted at a software firm, Finmatica.

More even than Parmalat, Finmatica reinforces fears of a specific “Italy risk”, attributable to opaque reporting, poor governance, weak regulation and tolerance of corruption. Such fears could deter foreign investment, damaging an already weak economy. But there is also a risk of their feeding concern over Italy's creditworthiness, raising the risk premium demanded by investors for holding its sovereign debt - and thus the bill the government must meet to refinance it. The country's drive to trim its budget deficit and get into the euro may have distracted markets' attention from the fact that its public debt is still over 100% of GDP. Any derating post-Parmalat could be very costly for Mr Berlusconi's government.