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Italy to renew bad loan scheme with higher rating threshold: draft bill

ROME (Reuters) - Italy will renew for up to 36 months a state guarantee scheme to help banks shed bad loans, tightening rules to increase protection for some investors, a draft law decree seen by Reuters showed.

The ‘GACS’ scheme allowing banks to buy a guarantee from the state on the least risky tranche in bad loan securitization sales, has proved a success in helping lenders tackle the legacy of a deep recession.

In 2018 alone, Italian banks tapped the scheme to push 44 billion euros ($49.94 billion) in gross bad debt off their balance sheets, according to bad loan data provider Credit Village.

The cost of the guarantee has increased in recent months due to higher financing costs in Italy under an anti-European and anti-austerity coalition.

“Despite its higher cost, the GACS guarantee remains an important tool and its renewal is beneficial for banks,” Moody’s Investors Service analyst Fabio Ianno said.

“The ECB (European Central Bank) is pressuring euro zone banks to cut soured loans below 5 percent of total lending over the medium term and Italian banks are still at more than twice that level.”

In renewing the GACS scheme, Italy tightened the rules to increase protection for investors and lessen the risk the guarantee could be activated.

The decree raises to ‘BBB’ from ‘BBB-’ the credit rating threshold on the tranche of securitization notes that can be covered by the guarantee, known as senior tranche.

It also envisages a mechanism to stop interest payments on the riskier notes if collections fall behind initial projections.

When the scheme was last extended in August, the mechanism to calculate the price of the guarantee was tightened to fully incorporate the spike in the cost of insuring against default risks on Italian assets.

Based on the document, the government can introduce the new guarantee scheme for 24 months starting from the date it receives a green light from the European Commission.

The government can then agree with the European Union a further 12-month extension after the two years, the document showed.

The draft decree also contains measures aimed at ensuring Italian and British banks can continue to operate smoothly in the two countries in the event of Britain leaving the EU without a deal. It sets an 18-month period during which current rules would apply.

Two government sources said the decree was expected to be examined at a cabinet meeting on Wednesday, following a preliminary discussion later on Tuesday.

Writing by Valentina Za; Editing by Mark Potter and Emelia Sithole-Matarise