Debtors' Revenge

In 1993, Tomaso and Anna Longo took out a loan with the Banca di Roma to buy a two-bedroom house in the fashionable Prati section near the heart of Rome. The interest was a painful 12.5%, but the Longos had little alternative, since that was about the average rate on a home mortgage in those days. Anna, a civil servant, says that life became a matter of pinching lire. "We couldn't ever go away anywhere," she recalls. "We didn't even go out to the cinema."

Then a miracle happened. Italy's efforts to join the euro led to a steep drop in interest rates. By April 1998 the market average for new loans had fallen below 8.3%. Tomaso, a lawyer, noticed that this appeared to render his Banca di Roma loan illegal under a 1996 anti-usury act. The law prohibits creditors from charging more than one-and-a-half times current rates. Tomaso went to the bank and asked to renegotiate; he first was turned down, and then the bank offered a deal with a hefty refinancing fee. But the Longos kept pushing, and after paying a smaller penalty of about $4,000 they wrangled a new variable rate, as low as 5.6%. For the Longos, that means paying about $3,600 less every six months. It also means more freedom to enjoy the small luxuries of middle-class life. "I went to join a gym," says Anna.

A better life for the Longos and others like them could cost the Italian banking system dearly. In two decisions last year, the Cassation Court, Italy's highest appeals panel, declared hundreds of thousands of bank loans illegally usurious and put them up for renegotiation. That included loans made before the 1996 legislation. What's more, the court said that the banks would have to repay any excess interest they had collected in the past. Antonio Fazio, governor of the Bank of Italy, warned that banks stood to lose up to $24 billion.

Now it's compromise time. In late December Italy's center-left government approved a decree that offered some protection to the bankers. If the decree gets through the legislature and becomes law by the deadline this month, banks won't be crippled by enormous rebates to customers. But the decree also gave borrowers the right to renegotiate loans at a maximum rate of 12.2% for individuals and 12.7% for businesses.

Last month 13 consumer groups jointly denounced the "bank saver" decree, which would have cost lenders only about $1.2 billion. "We will take the government to court over this," says Elio Lannutti, chairman of Adusbef, one of the most aggressive consumer groups. "Banks must give back the money, and it must be clear they broke the law." Lannutti argues that Fazio is overstating the cost of returning cash to borrowers, dismissing the $24 billion figure as "psychological terrorism."

The government has bent, a little. The coalition parties in the Senate approved the decree along with amendments to reduce the cap on renegotiated loans to just under 10% for most individuals and even lower for first-time home buyers. But that may not be enough. The Greens, part of the governing coalition, are still dead set against the decree and have sworn to vote against it in the Chamber of Deputies unless it is amended yet again. Their vote is unlikely to keep the compromise from passing, but the split will look bad for a center-left alliance that is trying to present a unified front in anticipation of the spring elections. In an interview with the newspaper Corriere della Sera, Treasury Minister Vincenzo Visco sounded a defensive note: "Anyone who isn't mad or in bad faith knows we had to act. The Cassation Court's sentence risked throwing our whole financial system into crisis."

The banks, which have found little support among Silvio Berlusconi's center-right opposition, aren't much happier than the consumer groups. Maurizio Sella, chairman of abi, the Italian bankers' association, calls the amended law "unacceptable" because it interferes with the free market. But he is grateful that the decree at least recognizes that a mortgage that is in conformance with the law when it is made ought to remain legal. "If this point isn't clearly upheld, Italian banks may well stop offering fixed-rate mortgages," he predicts.

And that's the irony. Even if the anti-usury activists get everything they want, many ordinary Italians will still be choking on high-interest debts. Confesercenti, an association of retailers, reckons that about 120,000 Italian shops are in the clutches of loan sharks, or strozzini—literally, stranglers. A special commission has been set up to fight the loan sharks, who make billions of dollars a year off the backs of debtors. The strozzini have thrived because of weak competition from legitimate lenders. Banks rarely allow overdrafts or unsecured loans, for example. For small businesses in particular, a loan shark may be only place to turn when times get tight. But given what's happened to their business over the past several months, Italy's bankers may not be especially anxious to expand into new markets just now.