Distressed-Debt Investors Turn to Italian Banks' Bad Loans

Investors who buy troubled loans are flocking to Italy as banks begin disposing of the nation’s record stockpile of dicey debt. An unprecedented €166 billion ($224 billion) of nonperforming loans are on bank balance sheets, according to the latest data from the Italian Banking Association, up from €42 billion in 2008.

The country’s two-year recession swelled delinquent loans to 8.9 percent of total lending in May, the highest in more than 15 years, says the banking association. The economy, which shrank again in the first three months of the year after emerging from the downturn in the fourth quarter, is expected to expand 0.3 percent this year and 1.1 percent in 2015, a Bloomberg survey of economists shows. “Foreign investors have become more interested in the debt because it’s a good way to bet on the recovery of the country,” says Massimiliano Bertolino, founder and chief executive officer of Fare NPL, a real estate loan fund in Milan that helped London’s Bayside Capital purchase its first Italian bad loan portfolio in May. “The potential upside is very high.”