EUROPEAN Central Bank (ECB) officials are drawing up a program to cope with potentially hundreds of billions of euros of unpaid loans in the wake of the coronavirus outbreak, sources familiar with the matter said.

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 program had accelerated in recent weeks.

The ECB declined to comment on whether it was working on a bad bank program.

The amount of debt in the eurozone 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 eurozone 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 program in recent weeks, one of the people said.

As the eurozone’s most powerful institution, ECB’s backing for the project is critical but it would also require the blessing of Germany, the bloc’s biggest economy.

Berlin has long opposed programs that accept shared responsibility for debts in other countries although it recently had an unexpected change of heart, agreeing to pool EU borrowing for a coronavirus recovery fund.

One blueprint under discussion would involve the European Stability Mechanism, an EU institution which can provide financial assistance to eurozone countries or lenders, standing in as guarantor for the bad bank, the people said.

The bad bank would then issue bonds which commercial banks would buy in exchange for portfolios of unpaid loans, neutralizing the virus shock for Europe’s lenders. The banks could then lodge those bonds with the ECB as collateral for central bank funding.

Major European commercial banks could be called on to join forces to underpin the scheme, the second person said.

While European countries are now focused on launching a 750-billion-euro plan to help economies hit by COVID-19, the idea of a bad bank, and the ECB blueprint, could come up for discussion among central bank governors and ministers later this year.

Asked Tuesday about bad banks, Andrea Enria, the ECB’s chief bank supervisor, said while he supported the concept, it was “premature” to discuss one now because it was not clear how severe the impact of the coronavirus outbreak would be.

“I have been very supportive of asset management companies. I think they are useful,” he told reporters, highlighting the success of bad banks in Spain and Ireland in the aftermath of the financial crisis. “Many of these schemes have ended up in the black, making profits.”

Enria said the ECB was studying how banks could cope were the crisis to worsen. He said banks had more than 600 billion euros (US$680 billion) in capital and this would probably be enough, unless there were a second wave of infections.

Still, any pan-European program to tackle the problem of bad loans would likely face political objections from Germany, which has long resisted attempts to support banks in weaker countries for fear it could get lumbered with unpaid bills.

Markus Ferber, a German member of the European Parliament, said Berlin remained opposed to taking on such mutual guarantees. “National bad banks could be a first step,” he said. (SD-Agencies)