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Italy asks EU to extend Guarantee that helped banks cut bad debt

Bloomberg - 07/04/2018

Lorenzo Totaro and Sonia Sirletti

Italy has asked European regulators to extend a state loan-guarantee plan that has helped its banks put a dent in Europe’s biggest pile of non-performing loans.

The Treasury under the previous government of Paolo Gentiloni had already signaled its intent to seek an extension to the plan, which expires on Sept. 6. The program allows banks to bundle their bad loans into securities for sale, while purchasing a state guarantee for the least-risky portions in order to make the debt more appealing to investors.

The GACS program is “working well” and helping lenders, newly appointed Finance Minister Giovanni Tria said in an interview in Rome. “We just notified the European Commission of the request” for a six-month extension of the program.

The plan was approved by the Commission in 2016 and got a one-year renewal last year. The Commission said at the time of approval that the mechanism would help lenders clean up their balance sheets and spur lending.

The market for Italian non-performing debt has heated up, helped by GACS and an improving economy, allowing lenders to launch more sales and beat disposal targets. The debt is attracting U.S. investors such as Fortress Investment, and Pacific Investment Management Co. as well as Sweden’s Intrum Justitia AB. Some banks have also been selling their debt-servicing platforms along with the loans.

The GACS guarantee has been used for sales by banks including UniCredit SpA, Banca Popolare di Bari SCpA, Carige SpA and Banco BPM SpA. Other lenders have started the process to use the program.

The country’s lenders are still weighed down by about 258 billion euros ($301 billion) of non-performing loans, according to Bank of Italy data for the first quarter. While that’s still the highest in Europe, it’s down from a peak of 345 billion euros at the end of September 2015. State guarantees to banks rose to 25 billion euros last year from 7 billion euros in 2016, according to the European Union’s statistics office Eurostat.

Italian bank stocks climbed in Milan trading, with financials some of the best performers. Mediobanca SpA gained 1.9 percent as of 11:31 a.m. UniCredit rose 2 percent and Mediobanca SpA advanced 1.9 percent.

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