Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

A fresh source of potential discord between investors and Rome has been brewing in recent months. Following the controversy over a surprise bank windfall tax in August that was subsequently watered down, proposals on debt markets from some members of the right-wing coalition government are drawing criticism.

They are another possible flashpoint after a proposal for corporate governance reform on the nomination of directors caused a ruckus and was largely scrapped this month.

Earlier this year, members of the Brothers of Italy party of Prime Minister Giorgia Meloni tabled some complex parliamentary proposals to help struggling Italian families and small businesses that risk being cut out of the credit market.

These would make it easier for certain borrowers who have already defaulted on their debt to buy back their loans, even if they have been sold on to professional investors.

Households and small businesses would have the option to repurchase impaired loans made between 2015 and 2021 that were sold by banks to third parties by the end of 2022, according to S&P Global. Fitch Ratings says if recovery proceedings have not started, borrowers will have to pay a 20 per cent premium to what the banks sold the loans for, or 40 per cent otherwise.

The proponents want the measures to be retroactive, in spite of the Bank of Italy’s warnings in 2020 against making any such provision applicable to non-performing loans already sold by the banks.

According to industry minister Adolfo Urso, the measures would apply to 1mn households and €279bn in bad loans. He said in an interview last month the government wanted to help “artisans and small businesses” that risked being denied financing because of previous defaults.

While helping local business owners is a commendable objective, the proposals have drawn warnings that they could lead to a harmful distortion of the country’s large NPL market. “This is yet another case of the Italian government wanting to shoot itself in the foot,” said one senior banking executive.

As Italy’s banking system reeled from the effects of the economic crisis between 2007 and 2015, its bad loans market grew unsurprisingly large. Some €300bn of NPLs were stuck on the balance sheets of Italian banks in 2015. This pile has been reduced by sales of the debt by banks. Multiple players — such as originator banks, servicing companies and rating agencies — are involved in the transactions, which have a highly complex pricing mechanism.

A paper authored by Orrick lawyer Patrizio Messina, who is also chair of the Center of European Law and Finance, warned the measures would result in serious damage to one of the strategic sectors of Italy’s financial system. They would affect “already established private arrangements with the risk of destabilising the management and recovery system of such receivables, which in most cases is entrusted to [servicing companies] under management contracts”.

There is another element that must be considered: many of the transactions are also covered by an Italian state guarantee.

The Guarantee on Securitisation of Non-Performing Loans is a tool Italy’s Treasury devised years ago to help financial institutions clean up their balance sheets. Intermediaries can request such guarantees, priced at market conditions, on senior tranches of securitisations (the less risky ones).

According to research by NPL Markets based on publicly available information as of May 2023, the Italian government is already facing potential losses of between €800mn and €2bn as a result of the guarantees. “Clearly, any new legislation improving the terms for creditors and impairing collections will only increase these losses for the Italian state,” NPL analysts said.

What’s more, Italy’s biggest loan servicer AMCO, with €36.1bn in assets under management, is publicly owned and its revenues from collections would be hurt by the proposed measures, the analysts said.

Italy’s finance minister Giancarlo Giorgetti this week tried to put an end to the plans, ruling out fresh measures. “We won’t trigger another market crisis,” said one Treasury official. And Meloni said last month: “There’s nothing in the works on NPLs at the moment.”

But others within Italy’s government say they will discuss the matter with all relevant parties before taking an official stance. So, fresh disagreements may still yet surface within the coalition over the NPL proposals.

silvia.borrelli@ft.com