Valentina Za, Giuseppe Fonte and Gavin Jones

ROME (Reuters – Italy is seeking to extend a scheme of state guarantees that helps its banks get rid of problem loans past a deadline in mid-2022. Three sources close to the matter claim they are open to talks with the European Commission for their consent.

The sources said that Rome was also in negotiations with Eurostat in an effort to stop Eurostat from changing its accounting rules, which would lead to Italy’s public debt spiraling.

Eurostat did not respond to our request for comment.

The ‘GACS’ guarantee program, which was first implemented by Rome in 2016, has proven to be a huge success. It reduces the loss banks have to make bad loans. Greece is now trying to duplicate it through its Hercules programme.

Banks can purchase a guarantee at market prices from the Italian Treasury under the GACS scheme to protect the most risky notes for selling securities or bad loans. This lowers buyers’ risk, and allows banks to get better prices.

Banca IFIS, a bad-loan specialist, forecasted in September that GACS backed transactions would eliminate Italian lenders of 94 Billion Euros ($106 Billion) in gross bad debts by the year 2021. That’s more than a quarter of the total impaired loans offloaded by this sector since 2016.

According to the terms of the agreement with the European Union competition authorities the programme will expire June 14, 2022. However, sources say that the Italian Treasury is open to talks with Brussels to renew the program in the early part next year.

One person said that Rome would want an extension of the “years.” This would enable its banks face the COVID-19 epidemic. Emergency support measures have been partially in place so far.

COMPLICATED

Eurostat is urging Italy to include the GACS guarantee as part of its public debt, complicating the situation.

Italy had the most debt in the euro area after Greece at a record 155.6% GDP by 2020. Rome projects 153.5% this year.

Eurostat reached out to both Greece and Italy in order to explore the possibility for an accounting shift, according to sources. The Italian authorities are close to dropping this idea however, they said.

Rome explained to Eurostat officials at an early meeting last week why the GACS programme was different than the Greek program, as two of its sources stated.

The latest information released by the Italian Treasury on April showed that GACS-backed debt was 10.4 Billion Euros at the close of 2020.

Because GACS-backed transactions are not meeting initial projections due to the pandemic, it has slow down loan recovery.

Scope Ratings reported last week that October bad loan collections in Italy were almost a third less than they were in the pre-COVID era.

($1 = 0.8874 euros)