Italy renews its bad debt regime with a higher rating threshold: draft bill
ROME (Reuters) – Italy to renew state guarantee program for up to 36 months to help banks get rid of bad loans, toughening rules to strengthen protection for some investors, draft decree has shown legislative consulted by Reuters.
The “GACS” program allowing banks to purchase a government guarantee on the least risky portion of bad debt securitization sales has proven to be successful in helping lenders cope with the legacy of debt. deep recession.
In 2018 alone, Italian banks used the program to remove € 44 billion ($ 49.94 billion) of gross bad debt from their balance sheets, according to bad loan data provider Credit Village.
The cost of the guarantee has increased in recent months due to rising financing costs in Italy as part of an anti-European and anti-austerity coalition.
“Despite its higher cost, the GACS guarantee remains an important tool and its renewal is beneficial for banks,” said Fabio Ianno, analyst at Moody’s Investors Service.
“The ECB (European Central Bank) is pressuring eurozone banks to reduce bad loans to less than 5% of total medium-term loans and Italian banks are still more than double that level . “
By renewing the GACS regime, Italy has tightened the rules to increase investor protection and reduce the risk of guarantee activation.
The decree raises the credit rating threshold on the tranche of securitization securities that can be covered by the guarantee, known as the senior tranche, to “BBB” from “BBB-”.
It is also considering a mechanism to stop interest payments on riskier notes if recoveries are lower than originally forecast.
During the last extension of the mechanism in August, the mechanism for calculating the price of the guarantee was tightened to fully integrate the increase in the cost of insurance against the risks of default on Italian assets.
On the basis of this document, the government can introduce the new guarantee scheme for 24 months from the date it receives the green light from the European Commission.
The government can then agree with the European Union on a further 12-month extension after the two years, according to the document.
The draft decree also contains measures to ensure that Italian and UK banks can continue to operate smoothly in both countries in the event that Britain leaves the EU without a deal. It sets an 18-month period during which the current rules would apply.
Two government sources said the decree is expected to be considered at a cabinet meeting on Wednesday, following a preliminary discussion later Tuesday.
Writing by Valentina Za; Editing by Mark Potter and Emelia Sithole-Matarise