Italy is considering tighter terms for the extension of its bad loan program


ROME (Reuters) Italy is looking at tightening its state guarantee scheme that is designed to assist banks in shedding bad debts. They are also weighing an extension to help cushion the damage of the Ukraine conflict and pandemic according to those who are familiar with the issue.

Since its introduction in 2016, the GACS program has helped Italian banks sell off the equivalent of 96 million euros ($103 billion) in bad 1 hour loan Ipass Loans by reducing the impact of the disposals on their profits.

At the end of 2021, investors had 11.6 billion euros of GACS-backed bonds, Treasury data showed in April. The current state is due to expire on the 14th of June.

Four people who were informed of discussions about the renewal of the scheme stated that Rome is considering reintroducing the scheme with terms adjusted to lessen the risk for taxpayers, and possibly seeking an extension of more than twelve months. One option that is being considered is an extension of 18 months.

The extension will need the approval of European Union authorities, which initially approved the extension after making sure it was compliant with EU regulations on state aid.

Rome is contemplating changes that could reduce the benefits for banks, and improve protection for the state, reducing the likelihood of being held accountable according to sources.

However, even on more restrictive terms, the GACS program could be able to help Italian lenders, who have eliminated around 250 billion euros worth of bad debts since the year 2015 and will be able to handle an expected increase in defaults by companies due to the pandemic as well as the Ukraine crisis.

Italy, under the program guarantees that the loan will be paid for the lowest risky bad debts that are repackaged into securities, is mulling raising at least one level up to BBB+, the needed rating for the “senior” tranche, the sources told.

Rome may also be able to reduce the percentage in the tranche senior that is covered by the GACS guarantees of the state, which is currently, 100 percent.

The guarantees are less risky for those who invest in securities, which allows banks to purchase the debts with a lower discount.


The effectiveness of the GACS scheme in closing the price gap between sellers and buyers has transformed Italy into the world’s biggest market for bank loans that are soured. These loans now comprise only 4% to 5% of all bank lending, a decrease from a peak in 2015 of 18 percent.

The government’s support measures in the last year have pushed bankruptcies down to a new low, but now businesses face capital repayments on a portion of 280 million euros of COVID-backed loans guaranteed by the state. This is as they struggle with record-high energy prices and raw materials costs.

In addition to attempting to help its banks withstand new challenges, Rome is also keen to protect the state’s coffers following loans were repaid in a few of the previous GACS-backed agreements that did not meet expectations.

Moody’s Investors Service said in April that 15 of the 28 Italian bad loan securitization transactions it studied had not met the initial estimates of collections which resulted in the median performance being below 35% in comparison to business plans.

Italy had already tightened up the program’s rules in the year 2019, increasing the rating of the senior tranche and also introducing mechanisms that force debt collection firms to adhere to their business plans.

To reduce the risk To further limit risks, the Treasury is looking into the introduction of a new measure of performance called the profitability ratio, sources claimed, in order to ensure the debt collectors from increasing profits by selling the loans, rather than recouping the loans.

If the indicator were to fall below a predetermined threshold, the recovery firms are not able to receive their variable fees or interest payments for the medium-risk “mezzanine” tranches will become temporarily frozen sources claimed. ($1 = 0.9320 euros)


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