Italy averts banking crisis with EU deal on bad loans

Pier Carlo Padoan

Pier Carlo Padoan at the Lisbon Council think tank, July 2, 2013. [Lisbon Council/Flickr]

Italy and the European Union reached agreement on Tuesday (26 January) to help Italian banks sell bad loans, averting a major banking crisis which had been brewing for over a year.

“An accord has been reached with the EU on a guarantee mechanism for bad loans,” said Italy’s Finance Minister Pier Carlo Padoan after nearly five hours of talks in Brussels with European Competition Commissioner Margrethe Vestager.

Italian banks’ gross “sofferenze” ? or loans least likely ever to be repaid — rose to €181 billion in 2014, more than double their level in 2010.

Rome had spend more than a year thrashing out a solution with Brussels, having to drop the idea of a “bad bank” in the process which would have contravened EU rules on state aid.

>>Read: Italian finance minister eyes ‘bad bank’ to clean up risky loans

Vestager confirmed the deal reached yesterday would not constitute state aid.

“I welcome the accord which we reached today with Minister Padoan on the terms of putting in place a guarantee mechanism to help Italian banks to face up to bad loans,” Vestager said.

“The guarantees are to be priced at market terms, so do not constitute state aid,” the Danish Commissioner said in a statement after the meeting.

With its debt-laden economy struggling to recover from a deep recession, Italy was keen to reach a solution to aid a banking system forced to set aside capital to cover bad loan losses, limiting lending to households and firms.

The scheme will assist Italian banks in the process of securitising and moving non-performing loans, currently on their balance sheets, to separate, individually managed entities, the Commission explained in a statement. Banks will be able to benefit from a state guarantee on the senior tranches of the securitised assets held by such entities, it said.

A independent trustee will be appointed to ensure the implementation of the scheme to ensure it does not constitute state aid.

The aim of the move is clear?averting a repeat of the crisis that hit the European banking sector, with potential disastrous implications for the eurozone.

According to the Bank of Italy, at the end of 2014, €237.5 billion worth of domestic bank debt was held by Italian households. However, new EU rules, which came into effect on 1 January impose losses upon shareholders and large depositors before recourse is given to public money, scaring off potential investors.

“The banking crisis we forecast for 2016 in Italy is coming to a head,” warned American analyst Jacob Shapiro, in an opinion piece published on EURACTIV. “It spells trouble not just for Europe’s fourth largest economy, but also for the European Union and an already sputtering global economy,” Shapiro wrote.

>>Read: Beware of Italy’s banking crisis

Such a disaster scenario may have been averted for now.

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