The Italian Treasury senior official revealed the plan by Italy to bail out all the banks of their bad debts, with the issue of bonds and lend credence to the securities.
This will be done by a separate vehicle which will assure guarantee to the investors. It will be available as investment-grade notes, equal to state debt, as per Alessandro Rivera, the head of the Italian Treasury’s Banking, Finance and Legal Affairs unit,in an interview.
“Non-performing loans have an investor market that’s very limited because these types of extremely complex operations are attractive to specialized investors,” Rivera said. “Vice versa, the market of investors in government bonds is enormous, the biggest in the world. With this operation we are transforming the quality” of bonds which have non-performing loans as collateral, he said.
No limits on guarantee, have been fixed by Italy, for such bonds. But they have to be issued in such a way, it should help banks to rid of their bad debts at least 50%, to be able to offset from books.
“What the market was hoping for was a clean-up of the worst bad loans - the sofferenze,” said Jonathan Tyce, European banking analyst at Bloomberg Intelligence. “Absent understanding how these are valued and make it into the securitizations, and with all the focus on senior tranches, it’s hard to see how this moves the dial.”
According to a Bloomberg News, calculation based on data from the European Central Bank, the investors are aware of the bad debts of around 360 million euros ($390 billion) which led to the fall of shares and bonds of Italy’s banks.
The need of the bad debts to be written off the banks’ books, is essential, to overcome the arrival of ECB and the Europe-wide legislation, which creates more loss to the investors and the banks to start lending again.
The FTSE Italia All-Share Banks Index is the lowest since October 2013, with a fall of 20% in this year. But it increased by 3.3% on Friday. Data compiled by Bloomberg showed, the bid of dated subordinated bonds of the banks with the largest piles of non-performing debts, such as Banca Monte deiPaschi di Siena SpA, is about 83 cents on the euro with yields of about 10 percent.
The guarantee scheme is to benefit both the investors and the banks. However, banks may have to take steps to maintain status quo to offset the debt value of 20% of par. The scheme also will free up the capital as per Moody’s.With the above scheme, the buyer gets back up guarantee from Italy.
Italy’s rating is now low at Baa2 by Moody’s and BBB by Standard and Poor’s. However, Fitch ratings is higher at BBB+.
“Somebody somewhere has to take a loss,” said Sharon Bowles, the former chair of the Economic and Monetary Affairs Committee of the European Parliament. “Meanwhile the extra contingent liability on the Italian state may be interesting for its rating.”
