Italy and Brussels struck an agreement Tuesday, Jan 27, over a mechanism to deal with the high level of bad loans in the country’s banks, that aims to end uncertainty over the lenders’ health and give a boost Italy’s economic recovery, the Wall Street Journal reports.
However, the Journal says, the lack of detail left it unclear whether the deal would succeed in addressing a problem that has helped provoke a collapse in Italian banking stocks this month.
The Italian government had submitted plans to help banks bundle bad loans in bonds, or securitize them, by being able to sell guarantees to banks that will make some tranches of bad loans less risky.
This would help banks sell them at higher prices and free up their balance sheets, allowing them to make new loans.
Under the agreement struck between the two sides, the guarantees would be priced at market terms, meaning they wouldn't violate the bloc’s state aid rules, according to the European Commission, the EU’s executive arm.
The scheme, alongside other reforms undertaken and planned by the Italian authorities, “should further improve the banks’ ability to lend to the real economy and drive economic growth,” EU Competition Commissioner Margrethe Vestager said.
Whether the mechanism will be effective will depend on the price paid by banks. If the price is too high then it may not be convenient for them to buy the guarantee for the state, according to the Journal.
Italian banks have struggled for more than two years to digest or sell their mounting piles of bad loans, due to thin capital buffers and low profitability.
Apart from sporadic deals, a real market for bad loans failed to take off in the country.
Bankers said the main reason for this failure has been a price gap between buyers and sellers whereby banks’ were willing to sell bad loans at prices higher than what buyers were willing to pay.
