(Bloomberg) -- Italy is negotiating with banks to provide breaks from debt payments including mortgages as it seeks to soften the impact of a nationwide lockdown to contain the coronavirus.
The government is considering unprecedented steps to inject money into companies and ease family debt burdens, Deputy Finance Minister Laura Castelli said in a radio interview. It’s also looking to aid those who experience temporary layoffs, she said, adding that a new decree on economic relief will be announced soon.
“Additional measures are urgently needed to grant liquidity to companies and help families, and banks are the main tool for the government to use,” said Massimiliano Romano, head of research at Concentric Italy. “Obviously, intervention could cause further risk to banks if their action isn’t backed by state and Europe guarantees.”
Italian bank association ABI has already announced voluntary steps implemented by most of the country’s lenders. Borrowers can ask to suspend or extend repayments on medium- and long-term loans including mortgages. The group also agreed to extend accords with the main corporate associations to suspend loan repayments and extend reimbursement deadlines.
Virus Response
Italy became the first country to impose nationwide controls to combat the spread of the coronavirus, with deaths edging toward 500. The government on Monday extended severe restrictions on travel and public activities to the whole country, just 48 hours after imposing a more limited ban in the region around Milan.
Last week, the country announced 7.5 billion euros ($8.4 billion) in aid to address the economic impact. The extra spending will lead Italy to break its budget deficit commitments by 6.35 billion euros, or 0.35 of a percentage point of gross domestic product. Italy is already in talks with the European Commission to be granted the necessary flexibility.
Italian bank loans to the private sector amounted to 1.41 trillion euros at the end of last year, according to data compiled by the ABI. Intesa Sanpaolo SpA, the biggest bank by branches, had about 400 billion euros outstanding.
Pressure on Banks
Efforts to deal with the emergency amid a worsening economic environment threatens to send Italy’s lenders back into crisis and undo years of painful restructuring, by boosting bad loans that lenders have worked for years to reduce and revive the specter of bailouts.
While banks can weather a short-term disruption, “a prolonged outbreak would have a more severe impact on both loan quality and profitability,” Moodys wrote in a note on Tuesday. A worsening economic outlook for Europe, deteriorating credit quality and central bank measures that further undermine profitability are the main concerns, the ratings agency said.
While Italian banks have more than halved non-performing loans from a peak of more than 360 million euros in 2016, to about 142 billion euros at the end of September, they still own the biggest pile among European Union countries. The Italian banking association in February asked for a one-year suspension of rules that force them to identify past-due loans as being in “default” to free up more money for lending.
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