| January 28, 2016 | 01:43 GMT |
Italy has struck a deal with the European Union to create a new system to manage its sizable nonperforming loan problem. Talks had been underway for a year with little progress, but in January the dramatic fall of Italian bank share prices added impetus to the negotiations. Talks finally concluded with an agreement between Italian Finance Minister Pier Carlo Padoan and European Commissioner for Competition Margrethe Vestager.
The new deal will create not just one bad bank but a new system in which the government helps Italian banks bundle their loans into new parcels for sale on the open market. A key question during negotiations was whether the Italian government would be allowed to subsidize these bundles with taxpayer money to make them more attractive to potential buyers. This is an important consideration because the riskiness of these loans gives them a rather low market value, meaning that if Italian banks were to sell them at market rates they would have to absorb the loss, further damaging their shaky balance sheets
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