The Italian government is preparing a law that would undo nearly a decade’s work to dig Italy out from under its mountain of bad debt.
The proposal would allow borrowers to buy back their own non-performing loans from those who hold them, at a specified premium above what the holder paid for them. This could nevertheless mean a steep discount to par, and to what the holder had hoped to recover.
This would put in jeopardy all that previous governments have done to build a world-leading NPL securitization market.
The proposal would apply retroactively to loans classified as non-performing from 2018 to 2021 and sold in portfolios by the end of 2022. Other proposals may cover loans of other vintages.
Since there is a clear political will to help struggling debtors, it would set a precedent that no NPL investment was safe. Investor confidence would fall away. Even if the NPL markets could stay open, spreads would blow up.
In early 2016, Italy opened its GACS scheme, in which the government guaranteed senior tranches of NPL securitizations rated triple-B or better, to encourage demand for NPL portfolios by making them cheaper to finance.
The scheme was instrumental in helping Italian banks slash their NPLs from more than 17% of assets before the scheme opened to 3.3% by 2021.
Creating the scheme required persuading the EU it did not constitute state aid. The government also had to make €20.5bn of guarantees, data from PwC suggest.
It was a bold strategy and it was rewarded. GACS was a genuine triumph for Italy’s government. It was so successful that Greece copied it in 2019. Brave policy making has given banks a market which is vital to managing their books, even during times of prosperity.
But the scheme closed for new deals in late 2022 and there has been no renewal. That is good news: Italy’s NPL securitization market is beginning to work on its own, without the boost from the state. The country could carry on reaping the rewards for decades.
It is all the more depressing, therefore, that the right wing Fratelli d’Italia government of Giorgia Meloni is now considering what amounts to vandalism of what has been achieved.
The timing could not be worse. Just as Italy’s NPL securitization market is finding its feet without government support, tough macroeconomic circumstances could set off a new wave of NPLs.
What Italy needs is to change course on this policy. It would give the market a boost, not only by avoiding a grave mis-step, but by showing that the political system can block damaging proposals.