By Giuseppe Fonte and Valentina Za
ROME (Reuters) - The European Commission on Monday gave Italy a green light for a one-year extension, until the middle of 2022, of a state guarantee scheme that has been key in ridding the country's banks of bad debts.
By narrowing the losses that banks must bear to shed bad loans, the 'GACS' guarantee scheme Rome introduced in 2016 has helped to turn Italy into Europe's biggest market for soured bank loans.
Italian lenders have cut those problem assets by more than 200 billion euros ($242 billion) over the past five years. GACS-backed disposals totalled 87 billion euros, consultancy KMPG has calculated.
Banks are bracing for a new wave of insolvencies driven by the coronavirus pandemic. Rome recently also reintroduced for 2021 the tax benefits for impaired loan disposals that expired in December.
After extending the GACS scheme once in May 2019 for two years, Italy needed approval from European Union competition authorities to prolong it for another year.
Similarly, Greece in April extended to October 2022 its 'Hercules' scheme that is modelled on the GACS.
Under the GACS programme, Italian banks can buy a guarantee from the Treasury to back the least risky notes when repackaging bad loans as securities.
In extending the measure, Italy rebuffed market demands to widen the scheme to include "unlikely-to-pay" (UTP) loans which, unlike bad loans, are not yet in default and could be recovered by returning borrowers to health.
The Treasury worried that UTP loans could be dealt with as defaulted loans by rating agencies and investors, tilting borrowers over the edge, sources have said.
"The market welcomes the renewal of the GACS scheme but it hopes Italy will find a way to widen state guarantee measures to include also UTP loans," said Dario Spoto, a partner with KPMG Corporate Finance in Italy.
"We expect GACS-backed bad loan sales worth around 20 billion euros before the end of the year, involving both larger banks and smaller players that can get together in multi-originator deals," he added.
At the end of last year, GACS-backed debt held by investors amounted to 10.4 billion euros, according to Italy's Treasury.
($1 = 0.8251 euros)
($1 = 0.8249 euros)