By Giuseppe Fonte and Valentina Za
ROME (Reuters) – Rome is in talks with the European Commission over extending a state guarantee scheme that could help Italian banks get rid of around 30 billion euros ($ 36 billion) of bad debts this year, two sources familiar with the matter told Reuters.
Banks are expected to face an increase in problem loans once governments withdraw measures deployed to keep businesses afloat during the pandemic.
Talks to renew the ‘GACS’ warranty program for one year from its expiration in May began earlier this year, one of the sources said, adding that negotiations are expected to continue at least until the end. March.
Both sources said there would only be minor changes to the program if it was extended, dashing hopes in Italy’s financial sector that it could be expanded to include “unlikely to pay” (UTP) loans. .
UTP loans, unlike bad debts, are not yet in default and can be recovered by restoring the health of borrowers, a much more complex process than recovering money through the courts.
Italian authorities are concerned about the difficulty of rating UTP loans and the possibility that they may be treated as defaulted loans by rating agencies and investors, pushing borrowers overboard.
Italy introduced the “GACS” program in 2016 to help banks cope with bad debts representing nearly a fifth of total loans after a deep recession.
After a slow start, it allowed Italian lenders to get rid of around € 85 billion in delinquent loans, according to bad debt specialist Banca IFIS.
The Treasury renewed the measure in May 2019 for two years, saying at the time that it could be extended for a third year provided the EU competition authorities allow it.
Greece is also negotiating an 18-month extension of its “Hercules” program, which replicates the GACS model and expires in April.
Under the GACS program, banks can purchase a Treasury guarantee to support less risky banknotes when selling bad debt repackaged into securities. This makes it possible to obtain a better price and to minimize the losses that banks incur when selling such loans.
($ 1 = € 0.8433)
(Edited by Kirsten Donovan)