Italy’s bad loan scheme delivering at last

A complex scheme Italy conceived to help the country’s banks offload their bad loans seems ready at last to deliver on its potential, as the lenders fight their way through a mass of practical problems.

The “GACS” State guarantee scheme, aimed at easing a major concern hanging over Italy’s economy, has had a long gestation. EU authorities approved it almost two years ago, and one senior banker has compared the drawn-out task of preparing debt sales under its rules with childbirth.

“The GACS is like a baby, it takes nine months,” the head of bad loans at Banco BPM, Edoardo Gin-evra, said in May. BPM, Italy’s third-largest bank, has started on a €3.5 billion GACS sale to hit the market in 2018 and hopes are high Italian lenders can use the scheme to deal with around 10 times that amount in the coming year.

JP Morgan, which with Medio-banca advised the Treasury on GACS, has predicted the scheme will help Italian banks to sell €30 to €40 billion in bad debts in the next 12 months. So far, only three sales totalling €2.8 billion have been struck in the 15 months since Italy completed the GACS framework in August 2016, and €860 million carries State guarantees.

Italy still has a long way to go. It accounts for a quarter of the eurozone's $1 trillion pile of bad debts left over from the crisis. Pressure for action is intense, with the European Central Bank still planning to force eurozone banks to set aside more money against newly soured loans, despite its openness to delaying the rules’ implementation.

A major concern for regulators is that the bad debt problem compounds the weakness of Italian banks, which are major funders of the country’s public debt, one of the world's largest.

Fellow eurozone economy Spain rescued its troubled banks with European help in 2012, while Greece, Ireland, Portugal and Cyprus have tackled their bad debt after adopting sovereign bailout programmes. In Italy the process has been much more drawn out, so rising GACS-backed sales are part of the push to force lenders to clean up their balance sheets while keeping losses to a minimum.

Banca Popolare di Bari, an unl-isted southern Italian bank which was the first to tap the State guarantee, said yesterday it had sold another €320 million in bad loans to a securitisation vehicle and would request the GACS guarantee for the deal. A significant boost will come from State-owned Monte dei Paschi di Siena, which plans to use the scheme for a €26 billion bad loan securitisation that the Tuscan lender must carry out under a bailout plan. This pools bad loans and reparcels them into tranches of debt of varying quality.

At the heart of the GACS programme is a State guarantee that protects buyers of the safest, or most senior, tranche. That lowers the risk to that of a government bond, cutting the securitisation vehicle’s financing costs.

“Given existing rules and the way the EU applies them, all that Italy is left with are half-measures,” said Andrea Resti, associate professor at Bocconi University. “But it’s becoming quite proficient at using them and the GACS is probably one of the best ones,” said Mr Resti, who advises the EU.

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