Rome is in talks with the European Commission to renew the “GACS” regime, which expired in June, and plans to toughen the conditions under which the state provides a guarantee to investors in bad bank loans repackaged in securities – known as name of securitizations.
The EU monitors these measures to ensure compliance with EU state aid rules.
The renewal comes as the euro zone’s third-largest economy is at the start of a recession triggered by sky-high energy costs and the banking sector braces for a spike in corporate defaults.
Originally scheduled after the summer holidays, renewal has progressed more slowly than expected, meaning some bad loan transactions due on December 31 will now continue without the collateral scheme and will be restructured once it is reintroduced.
Talks with EU authorities are expected to be finalized by the end of this year, with the GACS system operational again in 2023, the sources said.
Italy wants to agree a two-year renewal of the program, with the option of extending it for another 12 months afterward, the people added.
The Treasury changed the scheme to make it less generous for banks and to increase the protection of taxpayers, thus reducing the chances that they would have to bear the costs.
The scheme guarantees repayment of the least risky tranche in bad debt securitization transactions.
Rome had also considered raising the credit rating threshold needed for the senior tranche to qualify for GACS guarantees to at least ‘BBB+’, but two of the sources said there was no decision yet and that this change could still be abandoned.
Since its launch in 2016, the GACS program has helped Italian banks get rid of 117 billion euros ($115 billion) in bad debts by softening the blow from the divestitures to their profits.
As of June 30, GACS-backed banknotes accounted for 0.7% of Italy’s domestic production, or about 13 billion euros, according to Treasury data in September.
Italy had already tightened GACS conditions in 2019, raising the minimum senior tranche score and introducing mechanisms to incentivize debt collection companies to stick to business plans.
($1 = 1.0136 euros)
(Editing by Jane Merriman)
By Giuseppe Fonte and Valentina Za