Italian banks face another €10bn of writedowns from their massive books of bad loans says central bank boss

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Monte dei Paschi has become emblematic of Italy's bad loans problems (Source: Getty)

Italy’s banks face another €10bn (£8.7bn) in losses from the sale of their dodgy loans, according to the Bank of Italy governor Ignazio Visco.

Banks trying to offload their non-performing loans (NPLs) from their balance sheets to specialist debt collection firms will have to take a big hit, he said.

Speaking today at the central bank’s annual meeting in Rome, Visco said: “If they were sold at the very low prices offered by the few large specialist debt collection agencies active in the market today, which pursue very high returns, the amount of additional writedowns would be in the order of 10 billion euros.”

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At the end of 2016 Italian banks still had €173bn of NPLs on their balance sheets, or 9.4 per cent of the total, according to the Bank of Italy’s analysis excluding losses already accepted. The nominal value is as much as €350bn.

NPLs, in which no payments have been made for 90 days, could theoretically start to “perform” again as the economy recovers. However, Italian banks have in practice struggled to lower their ratio of bad loans as growth has remained weak in the Eurozone.

Visco also pointed to the “excessive time to recovery” for Italian debtors compared to other European countries with less laborious bureaucracies for the insolvency process.

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The bad loans were accumulated in the lending binge before the global financial crisis throughout the developed world, when underwriting standards dropped. When the financial crisis struck the proportion of Italian debtors unable to pay back their loans tripled.

Italian and European authorities were forced to step in to prop up parts of Italy’s banking sector, but have struggled to find private investors to front up some of the cash.

Instead, the Italian government has been forced to use loopholes in state aid rules to stop the banks from going under and imposing big and politically unpopular losses on bondholders, many of whom are Italian citizens.

The world’s longest-running bank, Monte dei Paschi di Siena, has become emblematic of these problems, with repeated failed efforts to find an outside investor. Visco said: “Negotiations are continuing between Italian and European authorities for precautionary public recapitalisation” of Monte dei Paschi as well as two smaller banks.