Giuseppe Fonte and Valentina Za
ROME (Reuters) – The European Commission on Monday gave Italy the green light to renew for one year, until mid-2022, a government guarantee scheme that has played a key role in ridding the country’s banks of bad debt.
By reducing the losses that banks have to bear when making bad loans, the GACS guarantee scheme, introduced by Rome in 2016, helped turn Italy into Europe’s largest market for problem bank loans.
Italian lenders have cut these distressed assets by more than € 200 billion ($ 242 billion) over the past five years. According to the calculations of the consulting company KMPG, sales with the support of the GACS amounted to 87 billion euros.
Banks are preparing for a new wave of bankruptcies caused by the coronavirus pandemic. Rome also recently reintroduced tax breaks for 2021 on the disposal of impaired loans that expired in December.
After renewing the GACS scheme once in May 2019 for two years, Italy required approval from the European Union competition authorities to extend it for another year.
Similarly, Greece in April extended its Hercules scheme, modeled on the GACS, until October 2022.
Under the GACS program, Italian banks can buy a guarantee from the Treasury to secure the least risky bonds when repackaging bad loans into securities.
In expanding the measure, Italy rejected market demands to expand the scheme to include “unlikely payoff” (UTP) loans, which, unlike bad loans, are not yet in default and can be repaid by restoring the health of borrowers.
The Treasury is concerned that UTP loans could be viewed by rating agencies and investors as unpaid loans, which sources say will turn borrowers around.
“The market welcomes the renewal of the GACS scheme, but hopes Italy will find a way to expand the government guarantee measures to include UTP loans as well,” said Dario Spoto, partner at KPMG Corporate Finance in Italy.
“We expect GACS-secured bad loan sales to be around € 20bn by the end of the year, involving both large banks and smaller players that may enter into deals with multiple lenders,” he added.
At the end of last year, GACS-backed investor debt stood at € 10.4 billion, according to the Italian Treasury.
(1 dollar = 0.8251 euro)
(1 dollar = 0.8249 euros)
(Edited by Gavin Jones and Paul Simao)