Italy takes breather before renewing bad loan scheme, sources say

By Giuseppe Fonte and Valentina Za

ROME (Reuters) - Italy will let a state guarantee scheme used by banks to offload billions of euros of bad loans expire in June while it finalises a stricter version to put to European Union authorities in September, two people close to the matter said.

Since its launch in 2016, Italy's "GACS" state guarantee scheme has helped Italian banks to shed 96 billion euros ($103 billion) in bad debts by softening the hit from the disposals to their earnings.

The scheme expires in its current form on June 14 and an extension needs approval from EU competition authorities, which cleared the original measures after ensuring they complied with the bloc's state aid rules.

Discussions between Rome and Brussels over the renewal of the GACS guarantees will enter the home stretch from September, one of the sources said.

The Treasury aims to use intervening period to make changes to the scheme, tightening its terms to reduce risks for taxpayers.

Under the GACS scheme, banks can buy a guarantee from the Italian Treasury at market prices to back the least risky notes when selling bad loans repackaged as securities.

As of end-2021, investors held 11.6 billion euros in debt guaranteed by the Italian state.

Overly ambitious loan recovery plans, the economic downturn and the court shutdowns brought on by the COVID-19 pandemic have caused collections on several GACS transactions to fall behind the original projections, a Treasury document prepared for the parliament showed.

Out of 33 transactions listed in the document seen by Reuters, 19 were underperforming the business plan, with collections reaching in some cases not even half of the amount targeted by the plans.

The Treasury had looked at introducing measures to allow a restructuring of the GACS transactions but one of the sources said this would have met legal hurdles and required unanimous approval from all note holders.

The success of the GACS scheme in bridging the pricing gap between buyers and sellers has turned Italy into Europe's largest market for soured bank loans. Such debts now account for less than 4% of total bank lending, down from a 2015 peak of 18%.

Government support measures last year to help business cope during the pandemic pushed bankruptcies to a record low, but they now face capital repayments on part of 280 billion euros in state-guaranteed COVID-loans, just as they grapple with record-high energy and raw material prices.

($1 = 0.9315 euros)

(Reporting by Giuseppe Fonte in Rome and Valentina Za in Milan. Editing by Jane Merriman)