Italy reaches bad loan deal with the European Commission

Italy and the European Commission have agreed on the renewal of a state guarantee scheme aimed at facilitating the sales of bad bank loans.

The former centrist Italian government had approved a scheme entitled Garanzia sulla Cartolarizzazione delle Sofferenze (GACS) which provides financial guarantees for securitised transactions of Non-Performing Loans (NPLs) that allow lenders to offload bad assets.

The so-called ‘GACS’ scheme was due to expire on March 6, but the Italian government reached an agreement with Brussels for an extension.

The GACS scheme allows lenders to negotiate with potential buyers. The buyer of the NPL then employs a credit-servicing business to realise the value of the loans with the spread between the ask and bid price representing the return for the buyer.

Italian lenders completed 13 GACS deals in 2018, shedding €44 billion in bad loans. Italian lenders hold a portfolio of least €100 billion more in bad debt.

Italy’s anti-establishment coalition government is expected to renew the scheme later this month, and the new bill could widen the scope of the state guarantee programme to include loans that are unlikely to be paid.

Competition Commissioner Margrethe Vestager confirmed on March 6 that negotiations on the subject are ongoing. Risks remain, however, that the European Commission could view state guarantees as a distortion of the bloc’s competition laws.