So, this chart did the rounds on Twitter this week and there is a lot of history behind it, but I have found an interesting short note in my library which is worth sharing.
Michael Kreile – “Public Enterprise and the Pursuit of Strategic Management: Italy” in Industrial Crisis, edited by Dyson and Willis. St. Martin’s Press, New York, 1983. Page 197.
The crisis of various sectors of Italian industry had complex origins. It is difficult, as Scognamiglio (1979, pg. 79) pointed out, to establish a clear distinction between the real and the financial components of crisis, both of which are closely intertwined. For example, the growing burden of financial charges that had to be borne by companies resulted from the rise of interest rates owing to inflation. Inflation was in turn fueled by rising labour sets and the growth of public sector deficits. The under-capitalization of Italian companies and the modernization efforts undertaken in the early 1970s reinforced the dependence of firms on external finance. Hence, firms became particularly vulnerable to the effects of inflation. The excessive reliance on external finance was caused by the decline in the self-financing capacity of firms and by the difficulty of raising equity because of the narrowness of the market for private shares and the troubled fortunes of large companies. In many cases, the banking system did not set any limits to the indebtedness of large firms. This process encouraged the development of highly capital-intensive sectors, opened the possibility of covering operating losses through additional borrowing and, finally, led to the virtual abolition of the institute of bankruptcy in the case of large companies.