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

The scheme currently in place, known as ‘GACS’, was due to expire on 6 March. 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 euro (37.9bn pounds) 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 100bn euro 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.