Italy puts renewal of 'GACS' bad loan scheme on hold, sources say

© Reuters. FILE PHOTO: Italian Economy Minister Giancarlo Giorgetti in Rome, Italy November 22, 2022. REUTERS/Remo Casilli/File Photo

By Giuseppe Fonte and Valentina Za

ROME (Reuters) - Italy has put on hold plans to revive a scheme under which the state provides guarantees to help banks offload bad loans, three people close to the matter told Reuters on Friday.

Earlier this year, the Treasury secured a preliminary agreement with European Union authorities to renew the "GACS" programme under revamped terms.

But Economy Minister Giancarlo Giorgetti never filed the formal request which is needed for Brussels to give an official green light, the sources said asking not to be named.

The EU has to vet such measures to ensure compliance with the bloc's state aid rules aimed at preserving competition.

Since its launch in 2016 until June 2022, when the programme expired, the GACS guarantees helped domestic lenders to offload 117 billion euros ($129 billion) in bad debts by softening the hit from disposals to their earnings.

The scheme allowed banks to buy a guarantee from the state to cover the least risky notes when shedding bad loans repackaged as securities.

Rome has been working for months to renew the GACS but Giorgetti is not entirely convinced Italian banks still need taxpayers' help, one of the sources said, despite risks of corporate defaults due to costly energy bills and higher interest rates.

With flows of impaired loans still at record lows, Italian banks are in no rush to have the guarantees reintroduced, another of the sources said.

In its Economic and Financial Document (DEF), the Treasury this week confirmed previous public finance targets to bring the Italian budget deficit-to-GDP ratio back under the European Union's 3% ceiling in 2026 from 8% in 2022.

The right-wing administration led by Prime Minister Giorgia Meloni, in office since October, has promised a cautious stance on state finances as Europe appears determined to adopt stricter budget rules starting from 2024.

As of end-2022, GACS-backed notes amounted to 0.7% of Italy's national output or 12.6 billion euros, broadly in line with 2021, the DEF showed.

Before the GACS renewal was put on hold, Italy was preparing to change the scheme to make it less generous for banks and to increase protection for taxpayers, reducing the chances they would be left out of pocket.

Under the terms discussed with the EU, the scheme would have covered 80% instead of 100% of the least risky tranche in bad debt securitisation deals, sources have previously said.

Italy had sought in January a two-year renewal of the scheme, with the option of extending it for a further 12 months after that.

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