As the international market continues to await feedback from the European Union's statistics agency, Eurostat, regarding how it will treat government-related securitized debt issues, two of the leading players in that arena, Greece and Italy, have already voiced what initial measures they plan to take in anticipation of the decision.

Italy said last month that it will move ahead with its planned EURO4 billion real estate securitization, adding that it has communicated information regarding the structure to Eurostat. Greece, however, last week publicly withdrew any further plans to securitize until the Eurostat verdict is reached.

The Greek decision, market sources say, may have been the more cautious one. Just because Italy will move ahead as planned does not necessarily indicate that the country's securitizations are structured according to the pending Eurostat verdict, observers warn. "Greece is waiting for a decision to be met until they decide how to proceed and Italy will continue," said one market participant. "It may be that Italy has to continue because they planned on a much larger securitization program for this year than the Greek government - so for Italy, waiting may not be an option."

Eurostat's decision may eventually change the way Italy and Greece proceed with future ventures. More importantly, however, it may also dampen the possibility of future EU contenders using securitization in the same manner that achieved the reduced debt levels both Italy and Greece saw in the past two years.

Risk transfer

In the meantime, however, Greece and Italy will be impacted the most by the ruling, because they have depended heavily on securitization as a tool to address the debt levels dictated by the Maastricht criteria.

The Eurostat verdict is expected to cover a number of areas, starting with what should or should not be eligible for securitization. In order to decide what will be eligible as off-balance-sheet debt, the committee is concentrating on risk transfer.

Unlike the Greek transactions, the Italian deals have had no government undertaking, which encourages some market players to believe that Eurostat will find no fault in its investigation of transfer of risk for the Italian government securitizations. However, Italian Treasury officials said that what has become a focal point in the Eurostat investigation is the gap between the potential revenue from the lottery receivables and the value of the bonds issued in deals such as the Italian securitization of lotto future flow receivables.

The Greek government, on the other hand, does provide an undertaking on all of its securitizations and the main thrust now, said sources, is how Eurostat will proceed with this definition of risk transfer. "In the case of Greece it's unlikely that they would have done these deals if it would have qualified as anything other than off-balance-sheet debt by Eurostat," said one market source.

Greece's GDP ratio has fallen rapidly as a result of the series of securitizations, which is one of the factors that helped the country qualify for the EMU in 2001. With the securitizations counted, it's estimated that the Greek budget is in surplus by 0.1% of GDP for 2001.

According to Dresdner Kleinwort Wasserstein, however, a negative ruling from Eurostat - meaning that they do not allow the proceeds of securitizations to be counted as revenue - would mean the Greek budget would reach deficit levels of 1.7% of GDP.

Domino effect

The European Central Bank (ECB) and the Organization for Economic Co-operation and Development (OECD) have both recently raised concerns over securitization as a practice to address deficit levels and both believe that governments need to consider more definite measures.

In its annual report for 2001 the ECB reports on its assessment of stability programs: "Progress towards the deficit targets is sometimes pursued via one-off measures, such as the sale of real-estate assets, which does not constitute durable fiscal consolidation." In the long-term, it translates into reviewing fiscal policy and management of public debt, which ultimately means cutting spenditure and reallocation of priorities - a "classic" request which the ECB asks all governments to do, said one spokesman with the bank.

And not unlike the ECB, the OECD said in its economic outlook that Italy in particular will have to take additional measures in order to meet its budgetary objectives over a two-year period.

Future potential issuers include Poland, who reportedly was considering following in the Italian securitization footsteps with a securitization of future lotto receivables; but the country is still at the very early stages of the game, as there is no definite legislation that facilitates securitization.

"To be honest, if it were not for the Maastricht criteria I doubt that [government securitization volumes] would be on the scale that they are," said another market source. "Nonetheless, this tool provides a new investor base and regardless of what decision is met governments will still want to continue."

The Eurostat decision is not expected to affect a country's decision of whether to securitize or not, but instead may simply alter the way governments go about the process. Going forward, governments may choose to bring under control the sale of assets through privatization, much like the U.K. privatization program. In that program, the government sold assets to entities and banks that were securitizing.

The governments who have already used securitization as a tool to reduce debt have strong arguments regarding risk transfer; but whether it will fall under the Eurostat criteria remains to be seen. What's clear is that in a couple of months government securitizations are poised to become more uniform. "While it won't become identical from country to country, the [Eurostat] ruling will offer less disparity on how these deals are viewed," noted one source.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.