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Italy, EU close to deal to revive GACS bad loan scheme, sources say

ITALY-BANKS-LOAN-GUARANTEES:Italy, EU close to deal to revive GACS bad loan scheme, sources say
ITALY-BANKS-LOAN-GUARANTEES:Italy, EU close to deal to revive GACS bad loan scheme, sources say Copyright Thomson Reuters 2023
Copyright Thomson Reuters 2023
By Reuters
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By Giuseppe Fonte and Valentina Za

ROME - Italy is close to clinching a deal with European Union competition authorities to reintroduce a scheme under which the state provides guarantees to help banks offload bad loans, four people close to the matter said on Thursday.

Rome has been working to renew the "GACS" scheme, which expired in June, while also tightening the terms under which the state provides guarantees to investors who buy bad bank loans repackaged as securities.

Discussions with Brussels are at a very advanced stage and the terms have been for the most part agreed, the four sources briefed on the matter told Reuters.

The EU vets such measures to ensure compliance with the bloc's state aid rules.

Initially expected to be finalised by the end of 2022, the talks have progressed more slowly than anticipated, leaving banks unable to tap the scheme for their year-end bad loan clean-up deals.

The renewal comes as the banking industry braces for a surge in corporate defaults as borrowers wrestle with rising interest rates.

Rome has changed the scheme to make it less generous for banks and to increase protection for taxpayers, reducing the chances they will be left out of pocket.

Under the new terms agreed with the EU, the scheme would cover 80% instead of 100% of the least risky tranche in bad debt securitisation deals, the sources said.

The Treasury had also considered hiking a credit rating threshold needed for the senior tranche to qualify for the GACS guarantees, but is instead leaving it unchanged, one of the sources said.

Italy has sought a two-year renewal of the scheme, with the option of extending it for a further 12 months after that, the source said, cautioning the EU was yet to decide on the matter.

Since its launch in 2016, the GACS scheme has rid Italian banks of 117 billion euros ($127 billion) in bad debts by softening the hit from disposals to their earnings.

As of June 30, GACS-backed notes amounted to 0.7% of Italy's national output or almost 14 billion euros, Treasury data showed in November.

Italy had already tightened the GACS terms in 2019, raising the senior tranche's minimum rating and introducing mechanisms to prod debt collection companies to stick to business plans.

($1 = 0.9177 euros)

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