Italy commences discussions over GACS scheme renewal

Although risk premiums for the GACS scheme are pricey for the Italian government, but given its size of 100 billion euros, the Italian government is likely to be hard pressed on ways to significantly trim it no matter how complicated it is.

As per a government source, Italy has started discussions with the European Union over the renewal of a state guarantee scheme that is designed to help banks trim their bad debts. While talks to renew the scheme, which is set to expire on March 6, are underway, there is no clear result in sight.

“There’s a series of options on the table,” said the source.

Rising risk premiums on Italian assets have made the “GACS” scheme costly. However, it is important to renew the scheme given the bad debt position of the country’s banks which still hold $113 billion (100 billion euros) in bad debts – a legacy of the financial crisis of 2007-2009.

When asked on the sidelines of an event in Milan whether GACS would be renewed, Italy’s cabinet secretary Giancarlo Giorgetti stated, “I think so, what else can we do?”

The GACS scheme was introduced in 2016 in order to mitigate and trim the bad debts in the bank’s balance sheet by helping them to sell them off at a higher price.

Although initially lenders were slow to adopt the measure, which allows them to buy a guarantee from the state to wrap the least risky tranche in a sale of bad loans repackaged as securities, it has gathered pace and has proved to be a success.

In 2018, Italian banks completed 13 GACS-backed deals shedding 44.3 billion euros in bad debt, equivalent to 42% of total sales, according to bad loan data group Credit Village.

In September, the Italian government stated, it would commence talks with the European competition to gain approval for a new scheme, in an effort aimed at widening its scope to include so-called “unlikely-to-pay” (UTP) loans which are not yet in default.

However, according to multiple sources, the UTP measure is proving to be too complicated and is unlikely to be pursued.

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