Photographer: Didier Weemaels

EU Steps Up Efforts to Deal With $1.1 Trillion Bad-Debt Pile

  • Action needed on NPL markets, legal frameworks, Malta says
  • Finance ministers to discuss issue April 7-8 in Valletta

European Union leaders are stepping up efforts to deal with the more than 1 trillion euros ($1.1 trillion) in non-performing debt weighing down the bloc’s lenders.

The Maltese government, which holds the rotating presidency of the EU, called for action to prevent the issue from threatening financial stability and hurting economic growth, according to a note that was circulated ahead of a finance ministers’ meeting in Valletta this week. Valdis Dombrovskis, the European commissioner in charge of financial services, said in a separate letter to the presidency that his office will help coordinate a European strategy on non-performing loans among the 28 member states.

“Given its magnitude, the NPL problem will not solve itself, even in the context of economic recovery,” the Maltese presidency said in the note. “A multi-faceted approach combining a mix of policy actions, at national and possibly European level, is the most adequate way to address the NPL problem.”

Both documents were obtained by Bloomberg News. A spokeswoman for the Maltese presidency said the discussion in Valletta “will be framed” by the paper.

Soured loans are one of the key concerns of European officials because they can stifle lending to healthy parts of the economy. NPLs made up 5.1 percent of all bank loans in the EU at the end of last year, down 0.6 percentage point from a year earlier, the European Banking Authority said on Monday. Greece, Cyprus, Portugal and Italy are the countries with the highest shares of bad debt, according to the EBA.

Insolvency Frameworks

Malta’s note said it wants to ensure “consistent” treatment of banks in all markets and to avoid any kind of supervisory forbearance. Member states were also reminded of “uncertainty and inefficiencies” in national insolvency regimes that are behind the slow pace of NPL reduction in several states. More efficient frameworks, including on loan enforcement, could help lift the value of the bad debt, the note said.

Policy makers should encourage the development of secondary markets for bad loans. Possible deals are currently hampered by “large valuation gaps between buyers and sellers” and by issues including a lack of information on asset quality and insufficient liquidity, Malta said. This could be addressed by increasing transparency and by encouraging private investors, it said.

Dombrovskis said that “while those areas fall into the responsibility of different actors, to be effective, it would appear that parallel action needs to be taken in all these four areas.” The commission, the EU’s executive arm, “stands ready to contribute directly to such a strategy,” he said.

Bad Bank

EBA Chairman Andrea Enria has proposed setting up an EU-wide asset management company to take over and manage the sell-off of the banks’ soured loans. The bad bank would help establish a market for the loans by achieving a critical mass of such assets and giving private investors a one-stop shop for them, according to his proposal.

Read more: Bloomberg View: A ‘Bad Bank’ Could Be Good for Europe

Malta said that while such entities can help start a market, it didn’t work in every case. In some countries, bad banks helped offload assets from banks’ books, but sales in the wider market were limited, according to the note. If an asset management company were to be set up, it should use “pro-active strategies to maximize portfolio value,” the note said.

The European Central Bank, which oversees the largest lenders in the euro-area, has also made NPLs a priority. It published final guidance on the issue last month, announcing that it will send letters to banks with large amounts of bad debt on their books, reminding them to find solutions.

— With assistance by Viktoria Dendrinou

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