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Why Italian Government is wrong on NPL
It would harm itself on GACS and AMCO
Several rumors have been circulating in recent weeks regarding a bill to reform the NPL market formulated by some members of the governing majority. By pursuing the goal of favoring consumers and punishing investors, the government may be harming itself.
What do we know about the proposal?
Details of the proposal are not public, however, from the rumors circulating it should consist in a form of relief for insolvent debtors.
Basically, in the case of non-performing loans sold in a given time frame, the debtor would have the opportunity to free himself from his debt by paying an amount parameterized to the sale consideration of the relevant loan, plus a mark-up of between 20 percent and 40 percent.
Why should Italian Goverment introduce this change?
Because it believes this reform would help fragile citizens and balance the unfair gains made by shark investors in the past. It is based on the idea that large amount of bank credits have been sold at very low prices and private investors are making substantial profits while poor debtors are forced to pay back amounts of money way larger than what they would have given to the banks without the interventions of these investors.
What’s wrong with Government approach?
It fails to understand how NPL market (expecially pricing) and credit management industry works
It wrongly believes this would help a significant number of fragile citizens
It wrongly believes this would impact only greedy investors and fails to understand the negative consequences for the entire system
It doesn’t consider the potential burden for taxpayer linked to state owned entities that acquired or managed NPLs (AMCO, MPS) and GACS deals,
Why they fail to understand NPL market?
Because applying to a single loan the average price paid for a portfolio even adding some kind of markup is a misleading accounting fiction. NPL portfolios, expecially unsecured ones are made up of some borrowers collecting more than the average porfolio and some collection less or even nothing. If the portfolio has been priced statistically it is not known in advance which borrower will pay what.
Futhertmore there are significant operating cost and legal expenses to consider that make the busisess less profitable and riskier than what common sense may suggest.
Why this won’t help so many fragile citizens ?
Because those who could benefit from the proposed law do have resources for a partial reimbursement and probably would have been able to negotiate a discounted payment without any change in law. The proposal is therefore useless for those who would have closed a deal at price lower than that fixed by new law. It is convenient for those that could have paid more, but grants them an unfair advantage with respect to other weaker citizens and those who struggle everyday to pay back performing loans
Furthermore the new law would not have no impact for debtors in real need that cannot afford the closing amount fixed by law
Why this will not impact only investors ?
Because it would undermine credibility in rule of law in Italy: why a foreign entity should choose Italy as a place to invest if the rules can change in such an arbitrary way? Why a local enteprenur should remain? This mean that banks would find more difficult to sale NPLs in future and probably would charge existing clients with higher cost to cover increased risk. If the rule applied to state owned entity like AMCO or to state guarranteed deals this would imply additional cost to taxpayers as well.
So a little change in rules may produce a large damage to banks, customers and even require an increase in taxes
What can we finally conclude?
That this new proposal may fall within a well known pattern:
Politicians propose something that may increase their popularity but with heavy negative consequence for the country because the proposal is based on a wrong understanding of how economy works and people behave
Tecnicians figure out that it won’t work and either add exceptions or costraints that make te proposal irrelevant either manage to abort it
Media brige the gap letting common people believe some kind of improvement in society has been achieved or attempted
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