MILAN (Reuters) - Italy has rebuffed calls to widely include businesses who were already struggling to repay their debt in its latest coronavirus economic aid package, two officials who worked on the measures said, leaving lenders to face rising loan losses.

Rome this week approved an emergency decree that offers guarantees on more than 400 billion euros ($435 billion) of new bank loans to companies hit by the coronavirus outbreak.

Banking and business lobbies had called for the package to include loans extended to firms already in trouble before the virus hit and deemed still to have a chance to be restored to good health, the officials told Reuters.

Italian banks held 76 billion euros in such loans, known as ‘unlikely to pay’ (UTP), as of mid-2019, which are now more likely to default in the deep recession expected to follow the pandemic.

Under the decree, a set of state guarantees reserved for smaller companies with no more than 499 staff can be tapped by firms that were regularly repaying their debt up until Jan. 31.

That pre-dates the coronavirus contagion which emerged in Italy on Feb. 20-21, in a limited concession to companies whose troubles cannot be traced back solely to the virus.

The two officials said there had been intense discussions on the cut-off date, which is relevant in terms of compliance with European state aid rules.

“By setting Jan. 31 as the cut-off date for the set of guarantees that can be tapped to refinance existing debt, the decree excludes the vast majority of problem loans,” Tommaso Foco, a partner at law firm Portolano Cavallo, said.

A government official said the Treasury was not currently considering extending further state guarantees for UTP loans.

In efforts to curb the spread of the virus, the government has enforced a progressively wider shutdown and it must now prop up companies at risk of buckling under mounting payment deadlines through debt moratoriums and guarantees on new bank debt.

The debt holiday applies only to companies that were performing up until March 17.

Annalisa Dentoni-Litta, a partner at law firm Orrick, said the new decree, though it had limitations, was “a step forward” compared to the debt moratorium package in terms of support for borrowers already in trouble.

While praising the new liquidity package, the head of Italy's third-largest bank Banco BPM BAMI.MI this week said UTPs remained a problem.

“There are companies that, helped by banks, were getting back on track. If they are denied the guarantees available to performing companies it’s clear there’ll be problems there,” CEO Giuseppe Castagna said in a television interview.

“I understand the government faces constraints due to European rules but it’s an important issue - these companies are still in business.”

As of mid-2019, Italian banks’ provisions against losses covered only around 40% of their UTP loans, against a 65% coverage for defaulted loans, pointing to a 19 billion euro gap in terms of additional writedowns. ($1 = 0.9205 euros)