* IMF analysts report highlights Italian hurdles
* Bank of Italy fosters securitisation and bad bank talks
By Anna Brunetti
LONDON, Feb 12 (IFR) - International Monetary Fund economists have joined the debate on how to solve the Italian banking system's bad debt burden, publishing a report on possible exit strategies over the weekend.
Developing a market for restructuring debt or distributing losses is vital, IMF analysts Kenneth Kang and Nadege Jassaud warned, in a country where non-performing loans trapped on bank balance sheets have topped 330bn. More than half of that is long-defunct credit.
"Defaulted NPLs do not generate interest revenues, yet require funding at market rates, tie up staff resources and capital," the report said.
"By weighing on bank valuation, they also raise the cost of funding and leave banks vulnerable to shocks," it added.
Despite this, Italian lenders have generally held on to their NPLs due to a mix of tax and legal disincentives to restructure, write-off or sell delinquent debt, the authors said.
The judicial system is also incredibly inefficient, they said. It takes more than six years on average to write off a bad loan, recognising losses and slashing its value, and more than seven years to complete a bankruptcy procedure. Foreclosing real estate collateral takes about three years.
Tweaks to insolvency rules in the past two years have partly allowed out-of-court restructuring, facilitating debt for equity swaps and less time-consuming accords between debtors and creditors. But they fell short of substantially cutting the number of court cases - 9.7m in 2012 - that arose from the doubling of defaults between 2007 and 2013, the report said.
Stricter loan loss provisioning and simpler insolvency and foreclosure rules could help Italian lenders finally strip bad loans from their balance sheets, distributing the risk to other market players, the report said.
Passing NPLs to asset managers would squeeze the gap between the banks' valuations and the market's valuations of these assets and allow sales, it said.
The authors see securitisation as one way of addressing the bad debt problem.
"Building on efforts to promote high-quality securitisation, the Italian NPL ABS market could provide another channel for offloading distressed assets," they said.
The NPL ABS market has died out after the last financial crisis, but was used successfully in the previous recessions between 1996 and 2000, they noted. As much as 50% of Italian ABS issued in 2000 was for NPL disposal.
"Both banks and asset managers would benefit from a liquid secondary market outlet," they said, and "applying the same reporting standards for HQS to NPL securitisation could support the development of the high-yield, risky end of the market."
The paper comes at a time when Italian policymakers are tangled in thorny discussions over possible public intervention to soothe the NPL issue.
That could be through establishing a bad bank, through state guarantees on NPL securitisation, or maybe the two options together, as comments by the Italian central bank's governor Ignazio Visco suggest.
"Public guarantees on activities deriving from NPL disposals would create more favourable conditions to develop a private NPL market," Visco said at an industry event on Saturday.
Creating entities to store NPLs could take two different forms: semi-public - benefiting from some degree of participation by governments or by the EU - and private.
While the Bank of Italy seems to have thrown its weight behind the former, the country's two largest lenders, UniCredit and Intesa Sanpaolo, have already expressed their preference for separate, market-based bad banks.
The two banks announced in April last year they would bundle their common bad loans into a vehicle that would effectively be owned by private equity firms KKR and Alvres & Marsal.
The new entity, which the two banks are looking to make operational this year, would initially restructure 2bn of loans, equal to 1.5% of gross NPLs of both banks, according to the IMF report.
But in the future, it could be open to other banks that have common exposures, they said.
This solution would exclude any public support.
UniCredit's CEO Federico Ghizzoni said on Wednesday the group will stick to its solo strategy. The plan for a public bad bank is a long way off, he said.
"We are already advancing on our own, and will not be particularly interested [in the plan]," either for selling or buying NPL portfolios, he said. The bank announced the sale of its bad debt unit and a 2.4bn of NPLs to Fortress Investment Group, yesterday, bringing the amount of NPLs divested to 5bn over a year, Ghizzoni said.
In June last year, UniCredit reported 81bn of non-core assets, absorbing 2.7bn, or about 6%, of its capital.
The IMF analysts estimate that if the stock was sold, it could release 1.6bn of capital, possibly generating 56bn of new lending. (Reporting By Anna Brunetti, editing by Anil Mayre and Julian Baker)