Italy has reached a deal with the European Commission whereby Italian banks can sell some of their 200 billion euros of bad loans.
Now we have this agreement, the risk of an Italian banking crisis has eased
The non-performing loans would be sold to private investors, with some Italian government guarantees, though the details of the deal are still being finalised.
The agreement follows almost a year of negotiations; the sticking point was whether those state guarantees were actually state aid, which is not allowed under EU rules.
The reaction was mixed, but one Milan-based trader pointed out that although this is a step in the right direction, the mechanics on how it will work are unclear and it could be costly for the banks.
Italian bank shares have slumped this year on fears that no effective way would be found to fix the bad loan problem, with those concerns spilling over into the country’s sovereign bond and credit markets.
Shares of Monte dei Paschi, which has lost more than half its market value since the end of 2015, jumped having hit record lows last week, but most other Italian lenders fell. Monte dei Paschi finished the day up 1.14 percent.
Accumulated during a 2012-2014 recession, the non-performing loans tie up banks’ capital and hold back new credit that could fuel a fledgling economic recovery.
“Now we have this agreement, the risk of an Italian banking crisis has eased,” said Daniel Lenz, a strategist at DZ Bank.
“The deal is perceived as too complicated by investors, but the reality is that it is a good step ahead and a game changer in the medium term,” Mediobanca said in a note.