The Italian government is requesting the European Union for another extension of the guarantee on the securization of non-performing loans (GACS), according to Reuters’ sources. With the EU’s approval, the extension would open the third year for Italy.
Italy is talking with the European Commission to expand the nation’s guarantee scheme to potentially help banks drop almost 30 billion euros or 36 billion dollars in bad loans in 2021.
This measure was taken as a way to address the anticipated issues caused by the upcoming end of GACS. The end of the plan is expected to cause a spike in problem loans, which can cause more issues in light of the pandemic.
The GACS scheme was launched in 2016 to aid financial institutions, particularly banks, cope with bad debts. Bad or non-performing debts made up a fifth of the total lending after the country experienced an economic recession.
According to the sources closely related to the issue, the two parties are talking about extending the scheme for another year after it expires in May 2021. The negotiations began earlier this year and are expected to last until late March.
This is consistent with NASDAQ’s report about Italy’s petition for a 12-month extension for the GACS scheme given the anticipated effects of the pandemic of debt.
Some are expecting the extension to have major changes including unlikely-to-pay (UTP) loans. These kinds of loans are different from bad debts as UTPs are not yet in default and only be recovered when borrowers regain the ability to pay.
The process of recovering UTPs is more complicated compared to claiming back bad loans through court proceedings.
However, the sources said that the changes are likely to be minor and it is unlikely to cover UTP debts.