Italy is seeking the return of a state guarantee scheme for up to three years, to help banks drop bad loans, and hopes to get the go ahead from the European Union before the end of the year.

Rome is currently holding discussions with the European Commission to renew the so-called “GACS” scheme, which concluded in June. The fresh plans involve tightening up the terms under which a guarantee is provided by the state to investors in bad bank loans, repackaged as securities.

The European Union evaluates such steps to ensure compliance with the state aid regulations within the bloc, Reuters reports.

Italy – the third-largest economy in the eurozone – is in the initial stage of a recession sparked by soaring energy costs and as banks prepare for a rise in corporate defaults.

The renewal of the scheme has not advanced as quickly as hoped. As such, certain bad loan deals due by 31st December will now go ahead without the guarantee scheme, and will be restructured when it returns.

It’s anticipated that discussions with EU authorities will reach a conclusion by the end of 2022, with the GACS scheme up and running by next year, according to sources with knowledge of the matter.

Italy is seeking to agree a renewal of the scheme for a two-year period, with an option of extending for another year, the Reuters report adds.

The Treasury has altered the scheme to make is less generous for banks and to boost taxpayer protection, reducing the odds that they’ll have to cover the costs. The scheme guarantees repayment of the tranche with the least risk in bad debt securitisation deals.

Since it was introduced in 2016, the scheme has helped banks in Italy to get rid of €117 billion in bad debts by reducing the impact from the disposals to their earnings.