Italy to re­ject bad bank to take non per­form­ing loan off the book

The Pak Banker - - Front Page -

ROME

Ital­ian Trea­sury of­fi­cials re­jected pro­pos­als to cre­ate a so-called bad bank to take non-per­form­ing loans off the books of the na­tion’s lenders amid con­cern the plan would strengthen the link be­tween sov­er­eign and bank debt, said peo­ple with knowl­edge of the mat­ter.

At least three re­struc­tur­ing ad­vis­ers held talks with gov­ern­ment of­fi­cials about a bad bank that Italy could fund with­out seek­ing ex­ter­nal aid, said the peo­ple, who de­clined to be iden­ti­fied be­cause the dis­cus­sions were pri­vate. The bad bank could hold 30 bil­lion eu­ros ($39 bil­lion) to 100 bil­lion eu­ros of as­sets and lenders would re­ceive gov­ern­ment bonds in re­turn for their bad loans, ac­cord­ing to one per­son. Italy didn’t so­licit the pro­pos­als and there is no cur­rent plan to cre­ate a bad bank be­cause de­te­ri­o­rat­ing credit is in line with the gov­ern­ment’s ex­pec­ta­tions, the peo­ple said. An of­fi­cial for the Rome-based Trea­sury de­clined to com­ment.

A bad bank is a tool the gov­ern­ment could use to spur a turn­around in the coun­try’s econ­omy by eas­ing fund­ing needs among smaller banks that would al­low them to boost lend­ing, said the peo­ple. Still, it could strengthen the link be­tween gov­ern­ment and bank debt, go­ing against re­forms in­clud­ing plans for a Euro­pean bank­ing union that seek to weaken that nexus that has ex­ac­er­bated the re­gion’s debt cri­sis.

“The last thing Italy needs right now is a fur­ther strength­en­ing of the links be­tween the sov­er­eign and the coun­try’s banks,” said Ni­cholas Spiro, manag­ing di­rec­tor of Lon­don-based Spiro Sov­er­eign Strat­egy. “While Ital­ian sov­er­eign debt is a much safer as­set class than a year ago, Italy is by no means out the woods and is seek­ing to dif­fer­en­ti­ate it­self favourably from Spain as much as pos­si­ble.”

The de­cline in Ital­ian bonds since the out­break of the debt cri­sis three years ago has weighed on the earn­ings of the coun­try’s banks, the big­gest hold­ers of the na­tion’s debt. The yield on Italy’s 10year bond has risen al­most 100 ba­sis points since the start of the debt cri­sis and the coun­try now pays 357 ba­sis points more to bor­row for a decade then Ger­many does. A ba­sis point is 0.01 per­cent­age point.

Ire­land and Ger­many have set up bad banks to get risky loans off the books of some of their lenders. Spain also is in the process of cre­at­ing a bad bank af­ter the col­lapse of its real es­tate mar­ket left the coun­try’s lenders with 180 bil­lion eu­ros of prob­lem­atic prop­erty loans and as­sets.

Gross non-per­form­ing loans at Ital­ian banks ac­count for 10.7 per­cent of to­tal loans, lag­ging only Greece and Ire­land in the euro area, ac­cord­ing to data pub­lished by the In­ter­na­tional Mone­tary Fund in Oc­to­ber. Italy’s bank­ing as­so­ci­a­tion says the rate is about half the IMF’s pro­jec­tion, es­ti­mat­ing the ra­tio at 5.9 per­cent at the end of Septem­ber.

While Ital­ian banks have stricter re­port­ing re­quire­ments for bad loans com­pared with other lenders in the re­gion, Ital­ian banks will need to raise more cap­i­tal from pri­vate in­vestors, Ig­nazio Visco, Italy’s cen­tral bank gover­nor, said on Oct. 13, with­out elab­o­rat­ing. The euro re­gion’s third-big­gest econ­omy con­tracted at a slower pace in the three months through Septem­ber and will emerge from re­ces­sion next year, Italy’s cen­tral bank said in an Oct. 16 re­port. The econ­omy won’t start re­cov­er­ing un­til the sec­ond half of 2013 as for­eign de­mand fails to off­set the ef­fect of a de­cline in house­hold spend­ing, the na­tional sta­tis­tics in­sti­tute said yes­ter­day. Gross do­mes­tic prod­uct will shrink 2.3 per­cent in 2012 and 0.5 per­cent in 2013, Rome-based Is­tat said.

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