Banks in Italy and Greece had been hoping that securitisation – the pooling together of loans, which are then sold as securities to investors – would help them to write off billions of Euros worth of debt that had been accrued over the last billing cycle.
It has now transpired that both countries will be taking very different paths in the coming months. While securitisation is still viable for Italy’s banks, Greece’s situation is far more complex.
Facing combined debts of over €180 billion as of December 2019, both countries are suffering two of the highest bad debt rates in Europe. This figure is also set to rise with the predicted influx of repayment issues from struggling borrowers.
Garanzia sulla Cartolarizzazione delle Sofferenze
Since as far back as 2016, the Italian government has been requesting securitisation to reduce the country’s bad debts. This was all started when the Garanzia sulla Cartolarizzazione delle Sofferenze (GACS) was introduced. Under GACS, banks can attain a government-backed guarantee on securitised debt – the only caveat to which is that this guarantee is only on the least-risky portion.
Over the last two years, Italy has securitised €71.5 billion of debts, leading some to suggest the wave has already peaked. However, with GACS being extended until May of next year, it can still be a useful tool for offsetting bad debt.
That being said, the use of securitisation is predicted to fall by between 50% and 70% by the end of the year, with banks set to pause all de-leveraging plans until the market restabilises.
Project Hercules is a similar government-backed scheme in Greece which predates its Italian counterpart. Whilst lauded by analysts, they also warned that Greece’s banks should not view this as the sole answer to the heaps of bad debt it has found itself in.
There are still concerns surrounding the balance sheets of major lenders such as Piraeus Bank SA who had planned to securitise €7 billion in bad debts over the course of 2020.
Experts such as Eleni Panagiotarea, who is head of the financial think tank FinGreece, believe that the Coronavirus outbreak could pose serious challenges to Greece’s securitisation plans.
This is down to myriad factors such as the disruption to banks’ lending capacities at such a crucial point, which she believes adds to the “number of hurdles [that] appear down the road: [such as] how the state guarantee will operate considering post-coronavirus conditions, the competition that Greek banks will now face in the European securitization market, and of course, how the value of collateral accompanying the loans to be securitized will be affected.”
The good news, she states, is that Eurobank has essentially guaranteed the use of Project Hercules after submitting a third securitisation plan.
The Bank of Greece is now having to look at other options as they doubt lenders will be able to de-leverage at the required rate.
A solution being tabled at the moment is a national-level bad bank, which the European authorities expect to be submitted by the end of May.
Another idea being touted is a pan-European bad bank, but both of these are likely to face considerable backlash as there is no desire from Eurozone officials to enter into risk pooling.