CRG Banca Carige SpA

By Manuela Mesco and Giovanni Legorano 

MILAN--The Italian government announced Wednesday the details of the deal it struck with the European Commission to help Italian banks manage their large portfolios of bad loans, pushing the shares in some Italian lenders higher in early trading in Milan.

Under the agreement, the Italian government will provide guarantees based on credit default swap prices on Italian bonds that are considered as risky as the bad loans themselves.

The government will help banks to bundle bad loans into bonds, thus securitizing them, by selling guarantees to banks that will make some tranches of bad loans less risky.

The details of the plan come after the European Commission and the Italian government reached an agreement late Tuesday after months of protracted negotiations on a plan for Rome to help Italian banks lighten their load of nonperforming loans.

The economy ministry in a statement said the guarantees will make it easier for banks to finance deals and shed some of their bad loans. Italy will guarantee only the safest loans, and banks can request a guarantee by paying a fee to the government.

The price of the guarantee will be calculated by considering CDS prices of banks that carry a risk level equal to that of the loans guaranteed. The price rises with the duration of the notes. The government will provide a guarantee only if the notes have a rating of investment grade or higher

The price of the guarantees was the most contentious part of the negotiations, as the European Commission wanted to ensure they were priced at market terms, so that they didn't violate the bloc's state aid rules. Were the price of the guarantee to be lower than what the market charges to insure comparable risk, then it would have been constituted as state aid.

The Italian government has been eager to find a solution to a problem that weighs heavily on Italian banks and the economy at large, which has shrunk 10% since 2009, a deep contraction that has hit local lenders hard. Years of poor management at the banks have combined with Italy's poor economic performance to push the level of bad loans higher.

Italian banks' gross bad loans, measured at their face value, stood at EUR201 billion ($217 billion) in November, 11% higher than the year-earlier period, according to the Italian banking association, ABI. This amount considers only the worst quality of bad loans, where the debtor is considered insolvent.

Gross bad loans were 10.4% of total loans in November, according to ABI, the highest percentage figure since 1996.

Concerns about the bad loans have soared recently, helping to send Italian stocks tumbling. An index of Italian banks has slumped nearly 25% since the start of the year, although it partly rebounded this week in anticipation of a deal with the commission on the bad loans.

Italian banking stocks rose early Wednesday on the news of the deal. Banca Monte dei Paschi di Siena SpA--the troubled bank that has among the heaviest nonperforming loan portfolios--failed to start trading on the Milan stock market for the first minutes of the session due to excessive gains. The stock jumped 7% once it did start trading.

While the FTSE MIB, the main Italian index, was slightly lower, most banking stocks gained. Banca Carige rose more than 5%, while UniCredit SpA and Intesa Sanpaolo, seen as stronger lenders, traded just slightly over parity.

Write to Manuela Mesco at manuela.mesco@wsj.com and Giovanni Legorano at giovanni.legorano@wsj.com

(END) Dow Jones Newswires

January 27, 2016 05:47 ET (10:47 GMT)

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