Before the coronavirus pandemic hit, banks in Italy and Greece had been pinning their hopes on securitization to help them run off billions of euros of toxic debt incurred in the last credit cycle. But the two countries could now follow divergent paths when dealing with bad loans.
Securitization — whereby loans are pooled together and sold on to investors as securities — looks set to remain a viable exit for Italian banks attempting a balance sheet cleanup once the initial shock of the outbreak subsides, analysts say. But for Greece the picture is more complicated.
Both countries came into the current crisis with some of the highest levels of bad debts in Europe, at €110 billion and €70 billion, respectively, as of the end of 2019. Not only do their banks still need to deal with this, but they could also face new inflows of bad loans as struggling borrowers default on repayments during the pandemic.
It is therefore in the interest of all parties, regulators included, that banks have a range of options on the table for unloading bad debts, including securitization, Alessio Pignataro, head of European nonperforming loans at DBRS Morningstar, told S&P Global Market Intelligence.
The Italian government has been actively encouraging banks to use securitization as a means of reducing bad debts since 2016, when it introduced Garanzia sulla Cartolarizzazione delle Sofferenze, or GACS. Under this decree, banks can make use of a government-backed guarantee on the least-risky portion of securitized debt.
Some €23.7 billion of bad debt was securitized under the scheme in 2019, and €47.8 billion in 2018. Some analysts believe that Italy's securitization wave peaked in 2018, but say that GACS, which has been extended until May 2021, remains a useful tool for banks.
"We believe that securitization will continue to play an important role for banks deleveraging," David Bergman, managing director and head of structured finance, at Scope Ratings, said in an email, adding that a wave of new defaults could accelerate the pace of deals in 2021. Securitization activity in Italy is set to fall by about 50% to 70% in 2020 as banks pause their deleveraging plans until market conditions improve, according to an April 28 note from Scope Ratings. Italy will see around €6.6 billion of securitizations in 2020 under Scope's baseline scenario, and €11.8 billion under an optimistic scenario. But the company expects securitization volumes to pick up again in 2021 as banks move to take advantage of GACS before it expires, and said it may depend on the speed of the recovery of the Italian economy.
Pignataro also sees a temporary slowdown in securitization deals in both Italy and Greece, where all of the systemic banks have submitted and agreed to deleveraging plans with European authorities.
"From an execution perspective all projects are proceeding, and at this stage we just expect some delays in the execution of some of them," he said.
Securitization as a deleveraging strategy has a shorter history in Greece than in Italy. The Greek government introduced Project Hercules, an asset protection scheme that, like GACS, provides a state-backed guarantee on the least-risky slice of debt, in February this year. The scheme was broadly welcomed by banking analysts, although some warned that it should not be seen as a panacea for Greece's bad debt woes.
Several banks had already launched major securitizations or were preparing them for market at the time the pandemic hit Greece, including Eurobank Ergasias Services and Holdings SA. The bank's CEO, Fokion Karavias, reassured analysts in March that the pandemic would not derail its banner €7.5 billion securitization, Project Cairo, a multi-asset portfolio of NPLs. At that point, Eurobank had already signed a binding agreement with a buyer, Italian special servicer doValue SpA.
But it remains to be seen how the balance sheet cleanups of other lenders, such as Piraeus Bank SA, which reported in February that it planned to securitize some €7 billion of bad debt this year, will play out.
Eleni Panagiotarea, head of Greek financial think tank FinGreece and research fellow at the Hellenic Foundation for European and Foreign Policy, believes that the pandemic could pose some material challenges to Greece's securitization plans.
"Swift implementation, central to restoring banks' lending capacity at a critical time, is disrupted, and a number of hurdles appear down the road: 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," she said.
She did, however, say she understands that Eurobank has submitted a plan for a third securitization that will make use of a Hercules guarantee.
The Greek government announced in April that it would provide guarantees on up to €2 billion of emergency loans to businesses facing a liquidity crunch thanks to the pandemic.
Talk of bad banks
The Bank of Greece now has doubts that lenders will be able to deleverage quickly enough using securitization, according to local media reports. It is now looking at other options — according to local newspaper Kathimerini, it is understood to be at an advanced stage of preparing plans for a national-level bad bank, which it will submit to the European authorities by the end of May.
But this plan is likely to face stiff resistance from the European Commission, Panagiotarea said.
A broader plan to introduce a pan-European bad bank is also unlikely to come to fruition as there is little appetite for risk pooling in the eurozone at present, she said.