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EU seeks more collective approach to dealing with bad loans

Posted July 11

— European Union finance ministers have backed proposals to jointly address the issue of non-performing loans in the banking sector, which has been an economic problem particularly in Italy and Spain.

At a regular gathering on Tuesday, the finance ministers outlined policy actions to reduce the EU's total stock of bad loans, which amounted to nearly 1 trillion euros ($1.14 trillion) at the end of 2016 — equivalent to 6.7 percent of the bloc's annual GDP, or 5.1 percent of total loans.

"Non-performing loans are a problem for the banking industry for which solutions have until now been mainly defined at the national level," said Toomas Toniste, Estonia's finance minister who was chairing the meeting as his country has taken over the rotating 6-month presidency of the EU.

"We need a more collective approach," he added.

Among the measures proposed is reform of insolvency and debt recovery frameworks, changes in bank supervision and developing so-called secondary markets where "distressed" assets can be sold.

The scale of the problem varies hugely between EU countries, according to a report prepared for ministers. Sweden's bad loans amount to only 1 percent of total loans, while Greece's account for a massive 46 percent.

Italy is one big economy that's been contending with loans gone bad.

Its banks have been worn down by some 360 billion euros ($400 billion) in loans that won't be paid back in full as a result of years of crisis and subdued growth that's made it difficult for firms and households to service their debts. At the end of 2016, the scale of Italy's non-performing loans stood at a bit more than 15 percent of the banks' total loan stock, a level that weighs on their propensity and ability to lend.

Last week, the Italian government took control of bank Monte dei Paschi di Siena under a relaunch plan that includes the disposal of 28.6 billion euros in bad loans at a big discount to their original value. The bailout includes the use of taxpayer money to shore up the bank, something new EU rules try to avoid, but was cleared by EU authorities.

The hope is that by getting a grip on bad loans, the Italian economy can move on.

Spain has also had its problems. Banco Santander, for example, paid the symbolic sum of 1 euro to take over local rival Banco Popular, a long-troubled lender that the European Central Bank warned was "failing or likely to fail." That was the first time the ECB had effectively pulled the plug on a bank since it getting new powers aimed at preventing financial institutions from disrupting government finances through bailouts, as they did during the eurozone's debt crisis.

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Pylas contributed from London.

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