Italy to approve new bad loan guarantee scheme by Tuesday: sources

ROME (Reuters) - Italy will approve a decree in the next few days to renew a state-backed guarantee scheme designed to help banks offload bad loans, two sources close to the matter told Reuters on Wednesday.

The sources said the emergency decree will be approved some time between the weekend and next Tuesday.

Renewal of the scheme is important for the country’s banks which still hold 100 billion euros ($113.05 billion) in bad debts.

The scheme, known as GACS, was first introduced in 2016 but expired in its current form on March 6. It allows banks to buy a guarantee from the state for some the bad loans that are being sold off.

“The new GACS will have a duration of two years”, one of the sources said, speaking on condition of anonymity.

It will continue to cover bad loans but plans to broaden the scheme to “unlikely-to-pay” loans proved too complex and will not be included.

Italy has reached an agreement with the European Commission to launch the new guarantee scheme, a requirement to avoid the scheme being classed as state aid.

The sources said the new guarantee scheme would cost more than the previous one due to rising bond yield spreads and market volatility.

According to the sources, the government will include the new GACS scheme in a decree on measures to ensure the smooth functioning of markets in case of a no-deal Brexit.

These measures are meant to clarify the rules for market operators in case Britain leaves the European Union on March 29 without a deal.

The decree will also include the size of Italy’s contribution to the future capital increase of the European Investment Bank.

Reporting by Giuseppe Fonte and Stefano Bernabei, editing by Stephen Jewkes and Jane Merriman