Italy expects EU to OK renewal of GACS bad loan scheme in April

ROME: Italy expects the European Commission to approve this month a one-year extension of a state guarantee scheme that has played a key role in freeing Italian banks from bad debts, two sources close to the matter told Reuters.

The move would extend the scheme introduced in 2016 until May 2022 and comes as banks are expected to face a surge in problem loans once governments withdraw measures deployed to keep firms afloat through the pandemic.

Italy has guaranteed more than 170 billion euros ($199.87 billion) in debt that banks extended to virus-stricken firms.

The government engaged in talks with Brussels earlier this year to renew the 'GACS' scheme and the two sources said it was confident of getting a green light by the end of April.

By reducing losses banks incur when selling bad loans, the GACS scheme has allowed Italian lenders to tackle the legacy of a recession that pushed problem loans to 18% of the total.

Under the programme, banks can buy a guarantee from the Treasury to wrap the least risky notes when repackaging bad loans as securities.

Consultancy KPMG said last month the measure had helped lenders complete a total of 35 transactions, freeing the sector of a gross 87 billion euros in bad loans, of which 16 billion was in 2020. It estimated an extension would allow banks to dispose of up to another 25 billion euros in bad debts in 2021.

Italian banks had lobbied for the Treasury to widen the GACS scheme to include "unlikely-to-pay" (UTP) loans which, unlike bad loans, are not yet in default and could be recovered by returning borrowers to health.

But sources said previously that only minor changes are expected to the scheme, with the Treasury concerned UTP loans could be dealt with as defaulted loans by rating agencies and investors, tilting borrowers over the edge.

UTP loans are included in Greece's Hercules programmes, which replicates Italy's GACS scheme and for which Athens is also currently negotiating an 18-month extension with Brussels.