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European finance ministers are aiming to clinch an agreement to unblock a stalled overhaul of the EU's bailout fund by as early as the end of November, as fears rise over a EUR300 billion surge in nonperforming loans once pandemic payment moratoria are lifted, EU sources told MNI.

Nearly 10% of bank loans in the eurozone are in moratoria, and some 20-25% of these could end in default, officials said, adding that it was urgent to approve the overhaul of the European Stability Mechanism in order to install a planned backstop to the Single Resolution Board which deals with failing lenders. EU bad loans, which stood at EUR529 billion in Q4, or 3.1% of total loans, have so far been contained during the Covid crisis by national-level public guarantees and moratoria, but officials fear the total will quickly rise once these emergency measures are lifted.

"The NPL problem is still there – maybe becoming bigger," one senior EU official said, "this is precisely why Banking Union is becoming more important."

The ESM revamp has been blocked in the Italian parliament by opposition and government lawmakers who say it would expose the country to a loss of economic sovereignty in case it needed assistance.


But officials are hopeful of a compromise deal at the Nov. 30 Eurogroup meeting of eurozone finance ministers. Italy and other countries will be offered an early introduction of the backstop, while in return so-called "frugal" member states such as Austria, Finland and Netherlands are likely to want to see further commitments to address NPLs in weaker banking systems, the officials said.

The number of EU loans moving from IFRS 9 Stage One to Stage Two, which indicates a significant increase in credit risk, is a warning of what is to come, officials said, but they added no big wave of insolvencies will come until next spring

"It's not existential, but it's not pretty," said a source, with another adding that "Credit risk monitoring in the banks is showing red lights."

European Banking Authority moratoria criteria were already tightened in September.

"Public guarantees remain in place, but still the change has consequences on the amount of capital and how much capital is needed for new loans," one source said. "What do we do when all these support measures (for the banks) end?"

On the positive side, progress is being made on crisis management and on improving coordination between EU bank resolution rules, national state aid and the Single Resolution Board.

Another source added that in the event of a 'generalised' banking sector crisis, the ECB could be expected to launch emergency liquidity operations, so containing the risk of a toxic feedback loop between banks and the wider economy.

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