By Giuseppe Fonte and Valentina Za

ROME Italy is reassessing how it plans to deal with billions of euros' worth of loans it guaranteed during the pandemic and energy crises in the event borrowers run into trouble, three people familiar with the matter said.

The sources said Prime Minister Giorgia Meloni's administration has put on hold a scheme designed to deal with such guarantees, which approached 9% of gross domestic product (GDP) at the end of 2022.

The 'GLAM' (Guaranteed Loan Active Management) programme centred around Treasury-owned bad loan manager AMCO and aimed to prevent banks from tapping the guarantees, because that would set in motion a process that would make it impossible to keep borrowers in business.

The project was engineered under the previous government of Prime Minister Mario Draghi.

Meloni's administration is also considering whether to keep veteran Italian banker Marina Natale at the helm of AMCO or replace the former UniCredit top executive with a person closer to the new government.

AMCO has grown over the years to manage 36.4 billion euros ($39.5 billion) of impaired credits with an above-average recovery rate of 4.7% of its portfolio in 2022.

However, the sources said the reassessment of GLAM was not related solely to whether Natale stayed on, but was a more far-reaching exam the new government was conducting on how to handle a potential hot potato.

LIMITING RISKS

The issue has wide implications for Italy's public coffers, as current legislation allows banks to tap the guarantee in full and flip the loan onto the state once a borrower misses a payment.

GLAM aimed to help in particular small and medium-sized enterprises (SMEs) that borrowed with state guarantees.

To limit risks that banks tap the guarantee if a company misses just one payment, Italy last August had agreed with European Union authorities the terms of GLAM, saying at the time the scheme could apply initially to 12 billion euros in loans.

Under GLAM, banks would shift debts of faltering SMEs to a separate vehicle and leave recovery efforts to AMCO and other bad debt specialists partnering with it.

AMCO was expected to launch GLAM between late 2022 and early 2023, but Economy Minister Giancarlo Giorgetti has never signed off on two decrees needed to detail how the scheme would work.

The Treasury wants to first test the potential of GLAM as well as its consequences before launching it, one of the sources said without providing further details.

The International Monetary Fund recently urged Italy to limit the use of financial vehicles to mutualise banking sector costs, adding that the size of GLAM should not exceed 0.5% of gross domestic output.

($1 = 0.9221 euro)

(Reporting by Giuseppe Fonte and Valentina Za; editing by Jonathan Oatis)