27 January 2016

Financial Times: Italy reaches ‘bad bank’ agreement with Brussels

Italy and the EU have reached a deal allowing Italian banks to sell their large portfolios of non-performing loans to private investors with a government guarantee, in an effort to ease market pressure on the financial sector in the eurozone’s third-largest economy.

The agreement, which follows months of tortuous negotiations between Rome and Brussels, is intended to clear one of the most worrying clouds hanging over the European financial system after the end of the continent’s long recession.

The €350bn of non-performing loans on the balance sheets of Italian banks — worth about 17 per cent of total loans and the same share of gross domestic product — has limited the country’s recovery by stunting new lending and made Italian banks especially vulnerable in the recent market sell-off that has afflicted global financial shares. The weakness of Italian banks has also put increasing pressure on the centre-left government run by Matteo Renzi, Italy’s prime minister, nearly two years into his tenure.

“[This] will make it easier to manage the remaining element of weakness in the Italian banking sector — which is the concentration of non-performing loans,” the Italian finance ministry said in a note on Wednesday.

Margrethe Vestager, the EU competition commissioner, said the scheme would not constitute state aid, since the guarantees would be priced at market rates. “Together with other reforms undertaken and planned by Italian authorities, it should further improve banks’ ability to lend to the real economy and drive economic growth.”

Ms Vestager and Pier Carlo Padoan, Italy’s finance minister, had met in Brussels on Tuesday, in an attempt to break the logjam blocking the deal.

The Italian finance ministry said the new scheme — which falls short of a genuine “bad bank” scheme in which public funds would have directly bought the bad loans — would allow a government guarantee to be attached to bundles of non-performing loans that were being sold by Italian banks. The price of the guarantee would be set based on the price of credit default swaps on Italian issuers with similar risk profiles to the loans in question.

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