TREVISO, Italy – On the flat plains of Italy’s Veneto region, in a small town about 20 miles north of Venice, Antonio Carpenedo has developed unusual cheese-making methods. At La Casearia Carpenedo, wheels of cheese are dipped and aged in wine — red, white, and Prosecco — while others are covered in hay and aged in barrels.
Mr. Carpenedo built this “drunken cheese” company from the rubble of a financial disaster. In the 1980s, rising interest rates shook his previous cheese business. “They bled us dry,” he said, recalling rates of 27 percent. The business had to be sold and he started over.
Today, fears of another financial catastrophe triggered by rising interest rates and economic uncertainty haunt his sons, who run the company, and has paralyzed their investment plans.
“Rates are going up and we don’t know what’s going to happen,” said one of the sons, Ernesto Carpenedo. “If we get to the rates we were in the ’80s, that’s devastating, and you’re basically killing the company.”
Over the past decade, interest rates have been at record lows in the 19 countries using the euro, and the European Central Bank designed this Programs to encourage banks to lend freely to businesses. Now, with inflation rising across the bloc, the central bank is changing course and tightening financing conditions in preparation for the European Central Bank’s first rate hike in 11 years, which is due on Thursday.
This change is being felt acutely in Italy, the eurozone’s third largest economy and a frequent source of political and economic headaches for the region. The central bank’s withdrawal of easy money in recent months has reignited investor unease over Italy’s high debt levels and commitment to economic reforms.
Over the past month, government bond yields, a measure of a country’s cost of borrowing that also serves as a benchmark for other borrowing, rose sharply. At around 150 percent of gross domestic product, Italy’s debt burden is the second highest in the euro zone.
Italy “is of systemic importance for monetary union because of its size,” said Sarah Carlson, senior analyst for Italy’s sovereign rating at Moody’s.
Rising borrowing costs are began to emerge as a concern across the continent. The European Central Bank has acted later than many of its international counterparts to tackle inflation, citing the fact that most of the price pressure has been “imported,” the result of global supply chain disruptions and rising energy prices, exacerbated by the war in Ukraine became. Policymakers have been urged to act amid signs that large price hikes are at risk of entrenching the economy.
In Italy, companies are used to navigating long stretches of weak economic growth and political upheaval. What is new is the sudden surge in inflation and the end of ultra-low interest rates.
Since the euro was introduced just over 20 years ago, inflation and interest rates have been low, making it easy to find the resources to expand, said Livio Libralesso, CEO of Geox, the Montebelluna-based footwear brand founded in 1995. The city has become a center of shoe production in the Veneto region.
Businesses no longer had to contend with devaluations of the lira or large swings in currency values with neighboring countries, and Geox was able to focus on innovation. It’s “a kind of heaven,” he said.
The euro’s weakness was compounded by fears that Europe could slip into recession due to energy disruptions. But Italy’s prospects are particularly challenging. The European Commission forecasts Italy will have the slowest economic growth on the bloc next year, just 0.9 percent, due to a slowdown in consumer spending as households tighten and lower business investment due to weaker demand and rising borrowing costs.
Due to the country’s dependence on Russian energy, there is a risk that Italy’s prospects will continue to deteriorate. Before Russia invaded Ukraine, Italy got 40 percent of its imported gas supply from Russia; that was reduced to about 25 percent.
Last week, without warning, an era of political stability and economic reform was in jeopardy: Prime Minister Mario Draghi’s technocrat-led coalition government appeared on the brink of collapse after just 17 months as Mr Draghi tried to break the deadlock amid politics.
“You can always count on Italian politics to throw a curveball,” said Federico Santi, an analyst at Eurasia Group. It expressed concern over whether a new government would continue to enact the reforms needed to secure around €200 billion worth of European Union funding for pandemic relief. The Italian parliament will vote on the future of the government this week.
The Veneto region is industrial and famous for its Prosecco, but its resilience to economic downturns and political upheaval is being tested by the darkening outlook for the world economy.
In recent years, the Carraro Group, which manufactures and exports parts for tractors, has continued its steady recovery from the 2008 financial crisis, taking advantage of low interest rates to sell bonds, restructure its debt and then invest. This year, outside Padua, the company planned to refinance part of its debt by taking out 120 million euros in loans, expecting to get better terms than the 3.5 percent it paid on its previous bonds .
But at 8:30 a.m. on the day Padua executives opened the book for orders, they had to close it again. It was February 24th and Russia had just invaded Ukraine. The company’s refinancing plan is now on hold.
However, the more pressing problem for the Carraro Group is rising operating costs. The increase in gas and electricity prices would have cost the company 116 million euros this year if it hadn’t been able to hedge against rising prices with its financial trading arm in Luxembourg. Instead, the energy costs Carraro 5 million euros more.
“The moment is very difficult and very complicated,” said Enrico Carraro, the company’s chairman. “At this moment there are all the ingredients to have a big and deep crisis. Maybe the heart of the storm won’t hit that hard, but we have to be ready.”
For smaller companies, there are fewer options to hedge against rising costs. About 12 miles north of Carraro’s headquarters in Castello di Godego, metal furniture maker Stocco has more than doubled the cost of the iron it needs since October.
CNA Treviso, an association for small and medium-sized businesses in the region that also helps companies get credit at low interest rates, estimates that companies are experiencing cost inflation of between 15 and 25 percent. Most of this is due to high energy charges.
With so much uncertainty about the future of energy and commodity prices, it’s a challenge for companies with limited flexibility when setting prices to know what to do next. Gianpaolo Stocco, co-owner of the furniture company, said commercial customers are waiting for Stocco’s prices for next year’s catalogues.
Prices could keep going up, but “if I use the current price, I could be out of the market in 2023 if it goes down again,” Mr. Stocco said.
Inflation in Italy is 8.5 percent, but Mr. Stocco expects the inflation his company is experiencing to be even higher next year.
He tells customers that Stocco’s prices will increase by 10 percent.
Expectations for such high inflation are bad for the central bank. The future course of inflation has a psychological component; Higher prices can become self-fulfilling if firms and households expect them and respond by setting higher prices and demanding higher wages.
Economists do not expect interest rates in Europe to rise anywhere near where they were in the 1980s, when double-digit rates were the norm, as recession prospects grow and the window for rate hikes narrows. But the combination of high energy prices, high inflation and slow economic growth has created tremendous uncertainty for companies that cannot predict when supply chain disruptions will ease.
La Casearia Carpenedo, the cheese maker, expanded and invested quickly during the low interest period, taking out loans to put solar panels on roofs and build machines to clean the barrels. In the last ten years it has spent more than half a million euros on investments. Now new investments have been put on hold, dashed the family’s hopes of opening a school to train new cheesemakers, buying land to grow their own grapes and planting a herb garden.
These challenges add to the existential questions companies often ask about the future of their industry.
At La Casearia Carpenedo there seem to be two clear options: return to the small artisan business or jump to the large international company? “That’s the question we’re evaluating,” said Ernesto Carpenedo. But “it’s not easy to understand today what’s going to happen tomorrow.”
Elisabetta Povoledo contributed reporting from Rome.