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Italy does deal with EU on scheme to shed banks' bad loans

The European Commission and Italy reached an accord on Tuesday on a scheme to help Italian banks sell some of their 200 billion euros ($217.04 billion) of bad loans, ending almost a year of often-tense negotiations.

The details are still being finalized, Italian Economy Minister Pier Carlo Padoan told reporters after a five-hour meeting with EU competition chief Margrethe Vestager, but the scheme is "a very useful instrument" based on state guarantees.

The non-performing loans, which accumulated during a three-year recession between 2012 and 2014, tie up banks' capital and hold back new credit that could fuel a fledgling economic recovery.

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Vestager also welcomed the accord, under which Italian banks will move the non-performing loans, currently on their balance sheets, to separate, individually managed entities in order to securitize them: sell debt backed by these assets.

Filippo Monteforte | AFP | Getty Images

Banks will benefit from an Italian government guarantee on the senior tranches of the securitized assets held by such entities.

The state guarantees are to be provided and priced at market terms so as not to constitute state aid, Vestager said.

"The Commission, with the help of a monitoring trustee... will monitor the implementation of the scheme to ensure it is state aid free," the Commission said in a statement.

Under stricter rules Europe introduced after the financial crisis in an effort to shield taxpayers, state aid can be provided to an ailing lender only after investors in the bank have borne a loss.

Negotiations between Rome and Brussels over the bad loan scheme have stalled for months over whether or not it contained an element of state aid.

Italian bank shares have suffered heavy losses this year over fears that no effective way would be found to fix the bad loan problem. But the country's leading lenders rebounded on Tuesday as investors bet on a positive outcome of the meeting between Italy and the EU.

Monte dei Paschi di Siena, Italy's third largest bank, has been particularly hard hit by the uncertainty and has lost some 43 percent of its market value this year, more than twice the losses of the Italian banking sector as a whole.