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Doubts surround Italy's NPL cleansing, but discounts show signs of reducing

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Doubts surround Italy's NPL cleansing, but discounts show signs of reducing

Themarket has reacted badly to Italy's moves to strengthen its banking system,although there are signs that discounts on soured loans are reducing.

State-sponsoredbank rescue fund Atlante ended up acquiring the bulk of throughits rights issueafter the capital raise failed to attract private investors. A similar fatemight await Veneto BancaSCpA, which could leave Atlante with only 40% of its €4.25 billionfund available to acquire nonperforming loans.

Skepticismabout this, as well as details about the decree aiming to ease banks' recoveryof collateral, helped to push Italian banks' shares by 10% in three days, Il Sole 24 Ore reported May 4.

"The[Atlante] fund will be able to intervene in a reduced number of banks,"Ignazio Angeloni, a member of the ECB supervisory board, told the senate inRome, according to Il Sole.

Giventhe tiny size of the fund relative to the banks' €360 billion nonperformingloans and €210 billion in bad debt, or sofferenze,at the end of 2015, the new legal decree on speeding collateral recovery waseagerly awaited. Published May 3, it failed to reassure markets, which reportedlyfeared the decree would only apply to future loans but not to extant contracts.

FinanceMinister Pier Carlo Padoan said, however, that the new decree "can applyto extant contracts" and said this is significant given that it shouldencourage loan restructuring, further cutting litigation and procedural times.He added that the decree would allow the banks to access collateral"within seven or eight months compared to the 40 months estimated for realestate transactions using legal procedures."

"Itdoes not seem to me to be a complete solution," Maurizio Cimetti, a lawyerat Legalitax in Verona who represents international funds investing indistressed debt, said in an interview. He said further changesboth to the law and, in particular, to the legal process were required.

"Itis right to insist on the reduction of the time required but you have to sayhow. What has been done thus far is not effective," he said. Over thecourse of a century, he said, the current laws had created a highly complexsituation that clearly favored the debtor over the creditor.

Cimettiwelcomed that Padoan had, for the first time, supported the principle thatsecuring Italy's finance system is more important than debtors' rights. Yetthis has still to change. If the debtor has pledged a building with a highervalue than the credit obtained, the debtor and not the bank can still determinethe recovery process.

Abank analyst who spoke on condition of anonymity commented on the government'slengthening list of actions.

"Noneof these measures individually is a big solution," he said. "Yet thegeneral ensemble is not too bad."

Heforesaw the funds still available to Atlante being used in a targeted way tohelp with the creation of an NPL market, and that moves were under way toattract private capital.

"Theyare not going to clear the system of NPLs. They are putting pressure [onprices]," he said. He reported that a person active in buying and sellingsoured loans had reported that discounts had reduced in recent times under theinfluence of the government measures. Yet he cautioned that Italy had yet todevelop a fully fledged NPL market.

Aninvestment banker with long experience of distressed debt markets said in aninterview that using Italian banks' money and gearing up the fund would createa much needed buzz and attract foreign investors. Acquiring debt in the 10%junior tranche would "really make some movement" because of thegearing effect, said the banker, who also wished to remain anonymous. Hepointed to the way that distressed Greek bank debt had found foreign buyers.

Thegovernor of the Bank of Italy, Ignazio Visco, said May 5 that "even if thefunds available now are limited, the creation of the Atlante fund could alsocontribute to unblock the bad debt market, thereby contributing to solving theNPL problem." He said it would take a significant amount of time.