Banks place Italy's Efim in default

RAISING the spectre of a 'first- world debt crisis,' foreign agent banks to Efim, the Italian state holding company, have declared the loans of the company and its subsidiaries in default.

A group of six foreign agent banks to Efim, including SG Warburg, Citibank and Chase Manhattan, formed a co-ordinating committee this week to negotiate with the Italian authorities about repayment of loans owed to foreign banks totalling about L3,500 billion. The six agent banks represent banking syndicates including many Japanese banks.

Efim - Ente Partecipazioni e Finanziamento Industria Manifatturiera - was put into liquidation by the Italian government on 18 July with total debts of L8,500bn (dollars 7.6bn).

Italy's third-largest holding group, Efim controls 140 companies that manufacture products ranging from helicopters to glass. The Italian government has frozen its debts for two years.

Bankers are said to be fuming over the liquidation of Efim and the way it was handled, as no banks were consulted in advance. Some foreign bankers have threatened never to lend to the Italian public sector again.

Yesterday the Italian Treasury said it was willing to meet foreign banks to discuss Efim. 'The Treasury is available to meet the foreign banks as a sign of openness,' it said.

The Treasury said it was surprised at the foreign banks' reaction, as all lenders were well aware of Efim's precarious financial state since they had charged high interest rates on the loans.

'It is worth noting the treatment of the foreign banks is identical to that of the domestic ones,' the Treasury added.

Although its financial troubles started 10 years ago, Efim was still able to borrow because of the implicit guarantee of state backing. It was liquidated as part of an effort to cut government spending and reduce the huge public-sector deficit. Bankers likened its role to that of the Gas Board in Britain in the 1970s, which was used as a borrowing agent.

The legal step of declaring the loans in default was in effect a formal demand for repayment from the debtor before an 18 September deadline, which will give some protection to creditors.

But bankers said it was also meant as a protest at the ineffectiveness of an Italian government package enacted earlier this week to guarantee Efim's debts.

Under the terms of a decree signed on Thursday, the Italian government would issue L4,500bn of five-year securities denominated in ecu and and lire to guarantee Efim's debts. The securities would carry coupons below current market levels, which was not acceptable to bankers.

'We are not happy with the sub-market coupon and do not want to wait another five years for our money,' one banker said.

In theory, if Efim now fails to pay, the next step would be to start proceedings in the English courts. But foreign banks are reluctant to initiate a long litigation process.