October 5, 2018 / 12:42 PM / in 16 days

UPDATE 1-Italy may widen state guarantee scheme for soured bank debt

(Adds details, comments)

By Giuseppe Fonte and Massimo Gaia

MILAN, Oct 5 (Reuters) - Italy is considering widening a state guarantee scheme that has helped banks offload a gross 36.5 billion euros ($42 billion) in bad debts, a government document showed on Friday.

A deep recession that ended in 2014 has saddled Italian banks with a pile of soured debt that peaked at around 360 billion euros in 2015-2016, before declining by more than 100 billion euros thanks mostly to large disposals.

Italian banks are large holders of the country’s sovereign debt and have also been badly hit by market turmoil over Italian bonds triggered by the new government’s budget plans.

Some of the disposals have been carried out through securitisation deals aided by a guarantee that banks were able to buy from the state.

The scheme, which Italy launched in 2016 after hard-won approval from the European Union, was recently extended until the beginning of March.

Italy said in an update to its Economic and Finance Document it would start discussions with the EU Commission on extending the scheme to include a broader spectrum of soured debt.

The GACS guarantee scheme so far applied only to the worst batch of impaired debt, or ‘sofferenze’.

Rome is considering extending it to unlikely-to-pay (UTP) loans, whose borrowers are not yet in default.

Unlike sofferenze, for which court proceedings resulting in liquidation are the standard recovery path, UTP loans can be recovered through an often complex and costly restructuring process that seeks to restore the borrower to health.

“That of UTPs is a very broad category which ranges from loans that can go back to performing to loans which are virtually sofferenze,” said Massimo Famularo, a board member at small debt recovery firm Frontis NPL.

“The GACS scheme could work for UTPs which are basically sofferenze or are backed by real estate assets.”

$1 = 0.8700 euros Additional reporting by Agnieszka Flak, writing by Valentina Za; editing by John Stonestreet

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