Italy has unveiled an initiative to minimise non-performing loans (NPLs) in the country's banking system, which will involve securitisations supported by a government guarantee. The programme is known as GACS - Garanzia sulla Cartolarizzazione delle Sofferenze.
Despite some unrealistic expectations in the market, this initiative is not a ‘bad bank’. Each participating bank can create one or more SPVs, which will acquire NPLs and be financed through the issuance of asset-backed securities.
In contrast to the bad banks in Ireland and Spain, the Italian baddebt problem is concentrated in loans to SMEs, not to households or construction. The high NPLs in Italy are a function of the GDP decline since the financial crisis, not a boom and bust in property. To avoid an increase in loan losses and a consequent reduction in capital, banks will likely structure these deals with ad-hoc pools aimed at limiting additional provisions. Investors must also analyse the quality of the relevant collateral, for example residential property, that is acting as guarantee for a large chunk of the Sofferenze. This collateral is being harshly overlooked by the market currently.
The scheme is a potential positive for bondholders, and possibly shareholders, given it is voluntary in nature. While it does not solve the bad loan issue overnight, it does give banks time to chip away at the problem.