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Banks and State Abandon ‘Oxygen Starved’ Italian Firms

An Italian cafe
Filippo Monteforte | Getty Images
An Italian cafe

Small and medium-sized businesses, the backbone of Italy's economy, are struggling to get funding from the country's debt-laden banks, forcing many out of business and worsening the country's economic crisis.

With an estimated 5 million enterprises accounting for 80 percent of Italy's gross domestic product, SMEs have long been the main driver of Italy's export-led economy.

The crisis for the SME sector is prompting widespread calls for the government to help small businesses and save the 'Made in Italy' brand from collapse.

"Every day the newspapers here in Italy tell you how many companies are closing down- yesterday it was 44 companies, the day before it was 66 companies and that is really not symptomatic of a good banking system in Italy," Marco Elser a partner at Rome-based investment bank Advicorp told CNBC.

Italian SMEs are being starved of funding as banks try to cut their balance sheets in the face of souring loans.

(Read More: Will Italy Waste ECB Breathing Space?)

Data released last month showed that bad loans held by Italian banks rose to 131 billion euros ($170 billion) in March, according to the Italian Banking Association, up 21.7 percent year-on-year. Lending by Italian banks to households and non-financial firms fell by 2.1 percent in April, the twelfth consecutive month of decline.

"The black money right now really is Italian retail and Italian lending to corporates because that's going absolutely nowhere, nowhere, nowhere. Italian corporates are starved of funding and they're starved of oxygen," Elser said.

Part of the issue is that many of Italy's small firms are family owned; they lack outside equity investors, making them almost entirely dependent on bank funding.

"My research shows that Italian SMEs are, on average, profitable and from a financial standpoint are strongly dependent on earnings retention (internal equity financing). Most of them are also family-owned. The above two features determine a vicious circle that so far prevented them from growing, and this has a significant impact on Italian [growth]," Francesco Baldi, professor of corporate finance at the LUISS Guido Carli University in Rome, told CNBC

"What they lack is the use of external equity financing, such as private equity (PE) investments made by closed-end funds. External equity in the form of PE may play a great role making a difference," Baldi added.

Italy's SMEs are also notoriously inefficient. There are approximately 65 SMEs per 1000 inhabitants in Italy, substantially above the European Union average of 40 per 1000 inhabitants, according to data from the European Commission (EC).

(Read More: Draghi: 'We Need More, Not Less Europe')

But while Italy has some 1.7 million more SMEs than Germany, they provide 3 million fewer jobs (12.2 million persons employed as opposed to 15.2 million in Germany) and produce only 56 percent of the total value-added of their German counterparts.

Such inefficiency, the EC noted in its 'Small Business" report on Italy in 2012, is part of the reason why, despite the attraction of the "Made in Italy" brand, Italy's SMEs "trailed their EU peers in recovering from the crisis."

'Made in Italy'

One company bucking the trend, however, is Orsobianco Dolciaria, a bakery business based in the northern Italian town of Cuneo. Set up and run by the Bonelli family since 1989, the business has managed to grow despite the crisis in Italy thanks to a patented process enabling them to produce frozen (and 100 percent natural) croissants that can be heated in three minutes in an ordinary oven.

The company has 50 employees and 80 distributors across Europe. Head of the firm, Luca Bonelli told CNBC that "he couldn't complain" as his company was doing well, but that there was no support for fellow SMEs.

"The situation in Italy is ridiculous. The banks are not helping at all but to be honest, no one in Italy is helping them, no one gives anything to Italian businesses here. The only thing that can save Italian businesses is innovation and exporting, but we don't do enough of either right now."

One option is to use covered bonds, backed by collateral from SMEs, to get banks to lend to the sector. Bankers are pushing for Italy to change its covered bond law, according to Reuters, to make this possible.

CNBC contacted the Bank of Italy for information on what it might do to support Italian SMEs but it declined to comment.

Meanwhile, Italy's government is reportedly consulting with bankers and lawyers to create an innovative form of SME financing which would involve pooling groups of companies together to help them raise debt, Dow Jones reported last month.

(Read More: Negative Deposit Rates Could Boost Bank Profit: Constancio)

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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