LONDON: Italian politicians shelved a measure to guarantee SME ABS in a vote on Tuesday, postponing a thorny debate on the possibility of publicly backstopping securitisation of non-performing loans.
The government's draft measure was a revised version of a plan proposed by the national deposit bank and other parties to tackle the overhang of NPLs on banks' finances, with the ultimate goal of rebooting lending to companies and households.
"The government decided to not propose a lengthy and complex measure at this stage," said Enrico Romagna Manoja, spokesperson of the economic minister, as the country lacks a head of state. Once a president is elected, "the measure will be included in a new proposal."
The delay may grant the government some time to clarify the type of loans it wants to guarantee through securitisation, after the NPL ABS plan prompted widespread scepticism.
The text of the draft law did not spell out the quality of the assets that should back ABS deals, strategically mentioning that guarantees could be granted to "new or existing" SME deals. "This could virtually mean both performing and non-performing loans," said Stefano Sennhauser, partner at law firm Allen and Overy.
COURTING CONTROVERSY
The ultimate goal of guaranteeing ABS tranches to enable the ECB to buy them, as part of its ABS purchase programme, makes the NPL option particularly controversial.
"It could have been an intentional choice to not take a clear position - and wait to see whether there will be support from the European level for NPLs," Sennhauser said. But if granting a public backstop to deals backed by non-performing bank assets sounds hazardous, the ECB buying them would be nothing short of surreal, some critics argue.
"The original project appeared aggressive," said Alberto Gallo, head of macro credit research at RBS. "We believe securitisation should be encouraged to stimulate new credit, not to clean up bank balance sheets" he said.
Public guarantees to NPLs carry substantial risks, he added. The ECB uses its repo eligibility criteria for its ABS purchase programme - which means it can only buy deals backed by high-quality pools. "To buy NPLs, the ECB would have to completely change its guidelines," an Italian banker said, adding it would be hard to imagine the central authority would be willing or even able to do so. "It's also about the ability to evaluate this type of credit," he said.
"The ECB limits itself to more familiar credit, where the type of risk it takes on is more predictable and understandable. "With NPLs, you would target a complicated type of asset, where it's more difficult to transfer the actual benefit to SMEs," he said. Channelling funds to SMEs is the chief aim of both the ECB programme and the Italian draft law to guarantee SME deals - a goal that politically justifies the presence of public authorities in a potentially risky market.
POLITICS VS ECONOMICS
Considering the EUR170bn burden of non-performing assets weighing on Italian banks, NPL securitisation may actually turn into a valuable economic tool. "From a practical point of view, it could create a mechanism to help banks solve the NPLs issue in the least disruptive way, contributing to the recovery of the banking system and easier access to funding," Sennhauser said.
Guaranteed NPL ABS could also be a useful initiative if authorities "fastened it to an obligation for the bank to originate new credit," said Gianrico Giannesi, partner at law firm Orrick. "Then the benefits would ultimately go back to the real economy." There are other obstacles, however.
"For it to work, you have to get banks on board before anything else," an economist said - and it may prove hard to convince bankers of the benefits of NPL securitisation, given the costs associated with it. In Italy, banks have been unimpressed by the valuations and spreads that markets would attach to these type of deals, the Italian banker said. They have preferred keeping NPLs on their balance sheets, even if it meant slashing their value to meet the EU Asset Quality Review criteria, he said. And considering the assets have already been written off for the AQR, "it may be more convenient for a bank to keep them on its balance sheets than to securitise them, if there's upside risk on their value," the economist pointed out.
The valuations that make NPL ABS unprofitable could also change substantially with a guarantee on one side and the ECB on the other of the trade. "There wouldn't be the risk of mispricing the assets as the ECB is not a speculative investor," Giannesi argued.
But the time may not be ripe for such a move.
The ECB has just tried to soothe political resistance to sovereign QE by announcing that the programme will be largely decentralised - which means that, on paper, the central bank of Germany, for instance, will not directly buy sovereign risk from Italy. "So coming up with such a plan [guaranteed NPL ABS] at a time when the ECB is trying to undertake quantitative easing could prove politically toxic," the economist said. "So even if you manage to solve the bank element of the equation, the ECB element would remain unresolved," he said.
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