The reversed risk perception in the Italian case

This note on the reversed risk is actually the English version of a paragraph of the book I wrote in 2009. The first, partial, version of this text can be found in a presentation that I have made in the 90’s at Bocconi University.

The situation I’m describing here below is history, now is over. However, some  remains still exist in the mentality of the Italian money savers.

I’m taking into consideration a typical deviancy that could be defined risk reversal.

In all the social systems, and even some of animal systems, we notice that, situations of greatest risk, correspond to the higher profits, while the easy and quiet situations are less profitable.

In the financial field, this corresponds to the fact that, the safest investments, particularly government bonds, pay a low interest rate, while investment less safe, in order to find customers on the open market, must offer a higher return.

The Italian system was different. For decades, the most profitable investment was also the safest: namely government bonds, mainly by virtue of tax exemptions. As a matter of fact, only the bonds issued after the 1.st of September, 1987, are subject to taxation, while previous bonds were and still are fully exempted. A few of them still circulate.

This has had devastating effects on the logic of the financial markets.

Added to this was the particularity of the real estate market, with its particular function as a safe haven, and the fact that majority of investors did not like the risk: an anomalous market derived, where the money savers preferred to  buy government bonds, so  giving priority to the financing the deficit of the state and neglecting productive investments, while the characteristics of the banking system made available funds for projects in the medium and long term only by a double intermediation mechanism, that was dominant in the past.

The last factor of deviation, finally, was in the poor risk appetite of the great Italian entrepreneurs: Italian capitalism was, by the beginning of the century, an assisted capitalism, to which has been added, starting from the Fascist era, a state capitalism, that became dominant afterwards, namely from  1962 until the ’90s.

This was impacting the financing of projects; for decades all major projects, have been financed with public funds or with public subsidies, while the small and average business have always had to rely on personal finance or otherwise on personal guarantees.

After the crisis of the early nineties, the causes of which are known to all, the situation worsened. On the one hand, in fact, public funds for major projects no longer existed or, where they existed, they remained idle on procedural grounds; on the other hand the small and medium entrepreneur, continued to find the same difficulties as always.

Starting from the beginning of the new millennium, the situation improved becoming quite normal.

 

Adapted and updated from: Gianluca di Castri – Project Management per l’edilizia (Ingegneria economica: applicazioni e sviluppo – Flaccovio, Palermo, 2009)