EXCLUSIVE-Italy seeks to extend 'GACS' bad loan scheme by 12 months - sources

MILAN/ROME, Dec 15 (Reuters) - Italy is working to extend by 12 months a state guarantee scheme designed to help banks shed problem loans, two sources familiar with the matter said on Tuesday, as the industry braced for a surge in pandemic-driven defaults.

Authorities are focusing on how best to help banks deal with the fallout from the coronavirus crisis, once governments unwind extraordinary measures they deployed to support businesses.

One of the sources said Rome planned to engage in talks with European Union competition authorities in January to renew the scheme, which would otherwise expire in May.

Italy introduced the ‘GACS’ state guarantee in 2016 to help banks deal with unpaid debt left behind by a deep economic slump. It renewed it in May 2019 for a further two years, which could extend to three years with clearance from the EU Commission.

Under the GACS scheme, banks can buy a guarantee from the Treasury to wrap the least risky notes when repackaging bad loans as securities to sell them.

The scheme, which reduces the losses banks are exposed to when shedding bad debts, has proven a success, prompting Greece to replicate it under a programme dubbed Hercules.

Consultancy KPMG said in April the GACS scheme had helped Italian banks complete 25 transactions since it was introduced, freeing the sector of a gross 71 billion euros ($86 billion) in bad loans.

The Treasury declined to comment on this story.

$1 = 0.8232 euros Reporting by Valentina Za and Giuseppe Fonte; Editing by Bernadette Baum