Italy's economy ministry on
Wednesday outlined parameters for a new guarantee mechanism
regarding non-performing loans, following an accord overnight
Tuesday with the European Commission agreeing that the new
mechanism doesn't call for State aid, the ministry said.
"The price forecasted for the first three years is
calculated as an average of the mid price of three-year CDS
(credit default swaps) for the issuers with ratings
corresponding to those of the guaranteed tranches," the economy
ministry said.
"At the fourth and fifth year the price will go up
following the application of a first step-up (5-year CDS) and
payment of a incentive increase to offset the lower rate paid
for the first three years".
"From the sixth year on, the price of the guarantee will be
full (7-year CDS). For the sixth and seventh year there will
also be an incentive increase due, to offset the lower rate paid
for the first five years".
Financial analyst Mario Seminerio called the new guarantee
mechanism "a market solution in the real sense, that will likely
change little in the non-performing loans situation of Italian
banks".
"Many of these (banks) still need capital increases, over
time," Seminerio said.
"The public intervention operates only 'in valleys' and as
such raises the rating of the senior tranches less than what
would have happened if the Treasury had been completely jointly
liable".
"The Italian Treasury in fact guarantees the most senior
tranches, those with less risk and less profit. But only if
those 'portions' obtain investment grade rating, that is, if
they aren't junk bonds," Seminerio said.
"Because of this structure, there will be banks that will
derive very small senior tranches, and therefore will be able to
free themselves of few non-performing loans, moreover at the
probable price of having to burn as losses the tranche equity
and the mezzanine".
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