At least three restructuring advisers held talks with government officials about a bad bank that Italy could fund without seeking external aid, said the people, who declined to be identified because the discussions were private. The bad bank could hold 30 billion euros ($39 billion) to 100 billion euros of assets and lenders would receive government bonds in return for their bad loans, according to one person.

Italy didn’t solicit the proposals and there is no current plan to create a bad bank because deteriorating credit is in line with the government’s expectations, the people said. An official for the Rome-based Treasury declined to comment.

A bad bank is a tool the government could use to spur a turnaround in the country’s economy by easing funding needs among smaller banks that would allow them to boost lending, said the people. Still, it could strengthen the link between government and bank debt, going against reforms including plans for a European banking union that seek to weaken that nexus that has exacerbated the region’s debt crisis.

Germany, Spain

Ireland and Germany have set up bad banks to get risky loans off the books of some of their lenders. Spain also is in the process of creating a bad bank after the collapse of its real estate market left the country’s lenders with 180 billion euros of problematic property loans and assets.

Gross non-performing loans at Italian banks account for 10.7 percent of total loans, lagging only Greece and Ireland in the euro area, according to data published by the International Monetary Fund in October. Italy’s banking association says the rate is about half the IMF’s projection, estimating the ratio at 5.9 percent at the end of September.

While Italian banks have stricter reporting requirements for bad loans compared with other lenders in the region, Italian banks will need to raise more capital from private investors, Ignazio Visco, Italy’s central bank governor, said on Oct. 13, without elaborating.

The euro region’s third-biggest economy contracted at a slower pace in the three months through September and will emerge from recession next year, Italy’s central bank said in an Oct. 16 report. The economy won’t start recovering until the second half of 2013 as foreign demand fails to offset the effect of a decline in household spending, the national statistics institute said today. Gross domestic product will shrink 2.3 percent in 2012 and 0.5 percent in 2013, Rome-based Istat said.