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UPDATE 1-Italian banks ready new measures as economy stops, but debt goes on

UPDATE 1-Italian banks ready new measures as economy stops, but debt goes on

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* Companies short of cash as payment deadlines loom

* Govt introduced debt holiday to stop defaults

* Treasury working on wider guarantee package for bank loans (Adds Banco BPM statement)

By Valentina Za

MILAN, March 23 (Reuters) – Italian banks are readying new credit measures for firms, which face a liquidity squeeze because of a lockdown to fight coronavirus that from Monday includes all business activity deemed non-essential.

The government has progressively tightened restrictions since the virus emerged in Italy around a month ago, driving a growing paralysis of economic activity.

Italy has registered more deaths than any other country and the number of confirmed cases as of Sunday was second only to China at 63,928.

The shutdown has dried up cash flows for hundreds of small businesses, which form the backbone of the Italian economy and could struggle to meet looming payment deadlines.

“The economy has stopped but debt doesn’t,” Italian banker Giovanni Bossi said.

To stop defaults the government has rushed to approve a six-month debt moratorium, but banks also face mounting demands for emergency loans to cover short-term needs.

“Businesses are scared about short-term liquidity. Just think of shut-down restaurants, cinemas, shops which, come the end of the month must pay rent, supplies, salaries,” he said.

Unable to foresee how long the emergency will last as the virus spreads and other countries replicate Italy’s containment measures, companies have been maxing out on available credit lines, bank officials say.

Italy’s top bank UniCredit said it would provide small- and medium-sized enterprises (SMEs) with additional lending worth at least 10% of current financing in use, partly through debt re-negotiations covered by a guarantee provided by the state through a fund for SMEs.

Italy’s government assumed in a draft technical document accompanying the emergency liquidity measures that SMEs in the next six months could triple amounts drawn on existing credit lines, more than they did at the height of the eurozone crisis between December 2011 and December 2012.

Italy’s third-largest bank Banco BPM said it was earmarking 3 billion euros for loans to companies hit by the virus crisis, following a similar move by heavyweight Intesa Sanpaolo which has set aside 15 billion euros.

To encourage banks to help businesses running out of cash, Italy’s government is working on a guarantee covering 90% of new credit.

It has also pledged to cover a third of the losses banks could face once the debt holiday ends.