ECB talks to Italy on buying bundles of bad loans

The ECB is in talks with the Italian government about buying bundles of bad loans as part of its asset-purchase programme and accepting them as collateral from banks in return for cash, the Italian treasury said.

This would be a big boost to a new Italian scheme that helps banks offload some of their €200bn of soured credit and would free up resources for new loans.

Here, Fitch Ratings said last week that it was not a given that it would automatically upgrade Bank of Ireland and AIB, because Irish lenders still carry a “backlog” of €30bn in impaired loans on their books.

“The banks’ weak asset quality is an obstacle to upgrades in the short term,” Fitch banking analysts said.

Nonetheless, it would likely fuel a debate in other countries about whether the ECB is taking on too much risk by buying asset-backed securities (ABS) based on loans that have not been repaid for roughly three months.

Italian Treasury officials told reporters that the ECB may buy these securities as part of its €1.5tn asset-purchase programme, or accept them as collateral from banks in return for cash, in so-called repurchase agreements.

The ECB declined to comment.

The bank has been struggling to revive inflation and is likely to cut its deposit rate again next month.

Italy’s high stock of bad loans has been a drag on the eurozone’s third-largest economy and is a growing concern for investors, who have been heavily selling shares in Italian banks since the start of the year.

The ECB has been buying an average of €1.19bn of ABS every month since November, 2014, Datastream data showed, and prefers securities backed by performing loans.

Under existing rules, the ECB can buy ABS as long as they have a credit rating above a certain threshold, thereby ensuring it only buys high-quality securities.

It also likely means the central bank will only be able to buy senior tranches, which are the last ones to absorb any loss if the loans are not repaid.

This would limit the pool of Italian ABS the ECB could buy. Italian banks can enhance the rating of their senior tranches by purchasing a guarantee from their government.

Reuters and Irish Examiner