March 5, 2019 / 3:33 PM / 17 days ago

UPDATE 1-Italy reaches deal with EU on new bad loan guarantee scheme - source

(Adds comment from EU’s Vestager, details and background)

ROME, March 5 (Reuters) - Italy has reached an accord with the European Commission to renew a state guarantee scheme aimed at easing sales of bad bank loans, a source with direct knowledge of the matter said on Tuesday.

The scheme currently in place, known as ‘GACS’, is due to expire on March 6. The government needs approval from EU competition authorities before launching a new programme to avoid it being classed as state aid.

Speaking on condition of anonymity, the source said there was a “de facto” deal and that the economy ministry had already drafted a bill.

Asked about a possible accord, a Commission spokeswoman said Brussels was in “constructive talks” with the Italian authorities.

In Rome for a parliamentary hearing, Competition Commissioner Margrethe Vestager also said discussions were ongoing.

The government may include the new GACS scheme in a decree containing measures to guarantee the smooth functioning of markets in case of a no-deal Brexit, sources have told Reuters.

A government source said on Tuesday that the cabinet was expected to approve the decree next week.

Italian banks completed 13 GACS-backed deals in 2018, using the scheme to shed some 44 billion euros in bad debt, according to bad loan data group Credit Village.

Rising risk premiums on Italian assets have made the GACS scheme more costly and less convenient but renewal remains important for the country’s banks which still hold 100 billion euros in bad debts, a legacy of the financial crisis which hit Italy’s economy hard.

Contrary to earlier expectations, the GACS scheme will not be broadened to include so-called “unlikely-to-pay” loans, several sources have said, because the issue proved too complex.

“In the last three years Italian banks have made remarkable progress. They have cut the stock of bad debts by 43 pct”, Vestager told the parliamentary hearing.

“The EU Commission has worked with Italy to facilitate nearly two thirds of this decline in bad debts”. (Reporting by Giuseppe Fonte; Editing by Kirsten Donovan)

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