Italy's bad loan proposal alarms investors
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2023-08-16 23:22
By Valentina Za and Angelo Amante MILAN A proposed law by Italian Prime Minister Giorgia Meloni's party to

By Valentina Za and Angelo Amante

MILAN A proposed law by Italian Prime Minister Giorgia Meloni's party to help borrowers who fell behind repaying bank loans has sparked alarm among investors in the country's 307 billion euro ($335 billion) market for bad debts.

Speaking on condition of anonymity because of the sensitivity of the issue, three industry sources said concerns had mounted this week after the Italian press highlighted a proposal that was sent on July 18 for examination by a parliamentary committee.

The news led to a flurry of emails within one international fund, and conference calls were arranged to discuss the issue, while investors requested clarification, one person said.

Meloni's conservative government created panic among investors in the country's banks last week with its approval of a surprise one-off tax on lenders' income derived from the gap in borrowing and deposit rates.

Faced with a market rout, the government clarified the measure would yield at most 0.1% of a bank's assets, but investors said the tax had damaged Rome's credentials with financial markets.

The separate proposal from Meloni's Brothers of Italy targets loans with a value of up to 25 million euros ($27 million) that banks classed as impaired between 2015 and 2018, and then proceeded to sell as part of a portfolio, or via a securitisation sale, by the end of 2022.

It aims to give borrowers the right to repay the original loan at a price equivalent to the ratio between the loan's gross nominal value and the average portfolio price, plus a 20% premium.

Such a rule would provide a 20% return for the loan's seller, but against a price that is an average of the loan pool when the value of individual loans within a portfolio can vary significantly.

Although it is unlikely that borrowers who have fallen into arrears would be in a position to use the rule to repay the loan at a discounted price, industry insiders said the changes would create uncertainty and undermine the market.

It would also give borrowers the option of stopping repaying loans because they know that European Central Bank rules force banks to offload bad loans to avoid having to provision them in full, two of the people said.

The measure would give borrowers the chance to cancel the debt once it has been sold, spending less than the cost of repaying its original value, they added.

The proposal sets an obligation for banks and investors to inform borrowers their loan has been transferred and at which price, and gives borrowers 30 days to exercise the option to buy it with the 20% premium.

($1 = 0.9162 euros)

(Reporting by Valentina Za and Angelo Amante; Editing by Keith Weir and Barbara Lewis)

Tags italy epus finance loans