ECB PREPARES PLAN TO HANDLE BILLIONS OF UNPAID LOANS

European Central Bank (ECB) officials are drawing up a scheme to cope with potentially hundreds of billions of euros of unpaid loans in the wake of the coronavirus outbreak, two people familiar with the matter told Matt Scuffham and John O’Donnell of Reuters on June 10, 2020.

The project, which comes as Europe mobilizes trillions of euros to bolster the region’s economy, is aimed at shielding commercial banks from any second fallout from the crisis, if rising unemployment chokes off the income needed to repay loans. One of the people familiar with the plan said the ECB had set up a task force to look at the idea of a “bad bank” to warehouse unpaid euro debt and that work on the scheme had accelerated in recent weeks. The ECB declined to comment on whether it was working on a bad bank scheme.

The amount of debt in the euro zone that is considered unlikely to ever be fully repaid already stands at more than half a trillion euros, including credit cards, car loans and mortgages, according to official statistics. That is set to rise as the COVID-19 outbreak squeezes borrowers and could even double to one trillion euros, weighing on already fragile banks and hindering new lending, the people familiar with the ECB plans said.

While the idea for a euro zone bad bank was discussed and shelved over two years ago, the ECB, under its new President Christine Lagarde, has consulted banks and EU officials about a scheme in recent weeks, one of the people said. As the euro zone’s most powerful institution, ECB backing for the project is critical but it would also require the blessing of Germany, the bloc’s biggest economy.