Italy deal with EU helps reduce banks’ bad loans

Rome / Bloomberg

Italy’s deal with the European Commission on state guarantees for banks’ bad loans will help lenders reduce their stock of deteriorated debt, even though markets offered a skeptical reaction, Bank of Italy Governor Ignazio Visco said.
“The guarantee mechanism will prove useful for facilitating the divestment of bad debts,” said Visco, who sits on the European Central Bank’s governing gouncil.
“There has been mixed market reaction to the announcement of the agreement; a detailed analysis of its terms and effects will improve its reception,” Visco added.
The European Commission agreed earlier this week on a plan to help Italian banks offload bad debts, ending months of negotiations on how to ease the burden on the nation’s lenders without breaching European rules. Banks will be able to bundle their bad loans into securities for sale, while purchasing a state guarantee for the least-risky portion to make the debt more appealing to investors.
The reduction of the stock of bad loans will take time, according to Visco, who said large volumes of bad debt depresses market assessments of banks, makes bank funding costlier, and generates high capital requirements. Bad loans held by Italian banks have been hit by record-low interest rates and a struggling economy.