Italy to widen state guarantees, helping banks cope with defaults-draft

MILAN, Nov 18 (Reuters) - Italy plans to widen an existing guarantee scheme for bank loans in a move that will help the country’s lenders cope with any future defaults sparked by the pandemic, a draft of the 2021 budget showed.

Italian banks have raised alarm about the combined effect an obligation to write down problem loans in full over a set number of years could have when coupled with a stricter definition of default kicking in soon and the troubles virus-hit businesses will face once weaned off emergency support schemes.

That obligation is known as “calendar provisioning.”

The draft budget extends to mid-2021 existing debt moratorium and guarantee schemes Italy deployed during the first COVID-19 wave in the spring to help firms raise new debt.

In addition, it allows larger companies, in addition to small firms, to tap state guarantees on their pre-pandemic debt if the sum is increased by at least a quarter and the maturity extended or its cost reduced.

“If this proposal becomes law, it will give banks an incentive to refinance corporate debt, lengthening its maturity and adding fresh liquidity. This will buy time for companies to attempt to recover as the economic cycle improves,” Gregorio Consoli, a partner at Italian law firm Chiomenti, said.

“This measure will also help banks in relation to the feared calendar provisioning, because the ECB will take the guarantees into account when it comes to setting provisions against loan losses,” he added.

“It will effectively allow lenders to keep a 0% coverage ratio for the first seven years after the loan starts deteriorating,” Consoli said.

The measure falls under a 200-billion-euro ($238 billion) liquidity scheme introduced in April run by export agency SACE, an affiliate of state lender CDP.

Approved by cabinet on Monday, the budget will go before parliament this week, to be approved by both houses by Dec. 31.

Italian banks fret about calendar provisioning because an inefficient judicial system makes it hard to recover unpaid loans.

A study by Cherry Bit, a company applying artificial intelligence to soured loans, this week showed Italian courts faced 11,000 new bankruptcy procedures a year while 83,000 remained pending. ($1 = 0.8415 euros) (Reporting by Valentina Za and Giuseppe Fonte; Editing by Toby Chopra)