Prudence pays in Spain, Italy

Months before the global financial meltdown this fall, the talk in the boisterous cafes of Rome and Madrid had turned from sports and politics to economic woes.

Despite increasingly bleak outlooks, however, the international financial panic did not hit Italy and Spain as hard as other European nations. Unlike France, Britain or Germany, there have been no major bank failures or rushed bank rescues south of the Alps or the Pyrenees.

Why? The reasons range from the prudence and discipline of institutions and individuals to the existence of large informal economies, analysts say. Not to mention remaining a bit old-fashioned amid modernization.

“Italians distrust banks,” said Mary Merva, an American economist at John Cabot University in Rome. “When you are not tied to institutions, that gives you a lot of flexibility. There are credit networks that don’t rely on institutions to get cash, but rather personal relationships. Italians often go to friends and family when they need money to start a business or buy a home.”

In recent years, Italy and Spain have enjoyed prosperity combined with a lifestyle -- food, fashion, leisure -- that is the envy of their northern neighbors.

Italy belongs to the Group of 8 club of wealthy nations thanks to traditions of industry and small-business acumen. Spain’s economy now rivals Italy’s after a decade of modernization propelled by real estate, construction and aggressive investment in Latin America.

But certain prudent habits remain ingrained from the years when the two nations sent out humble immigrants instead of free-spending tourists.

In a speech to Parliament here at the height of the international crisis Oct. 9, Economy Minister Giulio Tremonti explained that Italian banks were solid. Unlike most European banks, which were exposed by dangerous investment overseas to the American subprime mess and other financial toxins, Italian banks had not engaged in creative financing or other risky operations, he said.

“A characteristic of the Italian banking system is its less sophisticated character that has protected us from elements of the crisis we see in other European countries,” Tremonti said.

The Spanish banking sector, on the other hand, stands out for the sophistication and international muscle of Banco Santander and other giants. Nonetheless, government regulators and the banks themselves have shown notable discipline and prudence that has kept them safe.

“They have rigorous banking rules, wise bankers; the Spanish are doing pretty well,” said Francois Heisbourg, a French political analyst.

Similar caution exists at the street level. American families are as leveraged as their banks, with a savings rate that hovers near zero percent of disposable income. In contrast, Spaniards save at a rate of 10% and Italians at 6.8%, numbers that have declined from 12% and a frugal 21% a decade ago, according to the Organization for Economic Cooperation and Development.

Southern Europeans also tend to receive old-fashioned pensions that are not linked to the world’s stock markets. Similarly, they avoid dabbling in stocks in favor of buying government bonds or property. Spain and Italy have among the highest homeownership rates in Europe.

And there’s also a large informal sector in Italy that accounts for about 25% of the economy, as opposed to about 9% in the U.S. A chunk of that represents organized-crime activity, but most of it consists of off-the-books jobs and cash transactions. Italians still tend to avoid credit cards.

In Spain, meanwhile, the real estate boom chugged along for a decade before finally running out of steam a year ago. The intertwined real estate and construction sectors generated an underground cash-driven economy of their own: Spain has the highest concentration of 500-euro bills in the continent. The bills are known as “Bin Ladens”: Everyone has heard of them, but no one has actually seen one.

At times when doubts about the world banking system are acute, the presence of so much cash already in people’s hands has its benefits, though.

“In these circumstances, anything that removes you from the main circuitry is good for you,” Heisbourg said.

All that may be mild comfort. As a worldwide recession looms, the troubles of the globalized economy do manifest themselves in Italy and Spain: layoffs, plant closings, surging unemployment claims, bankruptcies, foreclosures.

The key to the future, Merva said, will be the extent of the crisis in the United States.

“The vulgar, crass consumption of Americans has been the engine of the global economy for a very long time,” she said. “Now what happens? What if Americans become like Europeans and start saving more and consuming less?”

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rotella@latimes.com