At the request of the European Union statistical body, Eurostat, the European Committee on Monetary, Financial and Balance of Payments (CMFB) has recommended that the securitization of fiscal claims by governments be treated as direct, on-balance-sheet state borrowing unless all of the risks (and benefits) are transferred.
It's likely that Eurostat will follow with formal guidelines on the use of securitizations that are expected to place a premature tarnish on the golden age of government ABS.
The CMFB opinion was based on a questionnaire put out to 20 national statistics institutes and 22 central banks. According to Deutsche Bank research, Eurostat has looked to refine the current rules following the increased use of securitizations by
EU member countries. "These new guidelines are particularly important for Italy, the most prolific user of securitization to date," the bank's analysts said.
Over the past several years, since Eurostat embarked on its mission to clear the air - or rather the balance sheet - on what European governments undertaking securitizations should or should not count as debt, the market has seen the share of government-backed deals dwindle. Less opportunity to shift debt off the books meant less incentive for countries, which initially turned to the capital markets as a way to mask government expenditures. Some governments shied away, while others soon found a reason to come back.
Italy, Belgium and Portugal have, in the past two years, initiated programs - Italy with its extensive debt transactions that typically center on regionally controlled healt-care receivables, and both Portugal and Belgium with the securitization of tax claims. And Greece has stood on the sideline with a possible tax deal that has yet to come to fruition.
Under the recently filed CMFB opinion, the large majority of participants considers that all securitization of fiscal claims should be treated as borrowing because of the likely direct or indirect control that governments would keep, or because it is appropriate that all securitizations of fiscal claims should be treated the same. The CMFB stated that government securitizations that incorporate a deferred purchase price clause, such as the Italian health-care deals, should automatically lead to a classification of the securitization operation as government borrowing, because the existence of a DPP is evidence that not all the risks and rewards of the operation are assumed by the purchaser.
Under these suggestions, most outstanding transactions become ineligible for off-balance treatment, making such debt expensive to service in comparison to regular government debt. The current Eurostat rules allow government securitizations to sell assets to SPVs at discounts of as much as 15%. Several outstanding transactions incorporate a DPP mechanism to account for the discount at which assets are sold to the SPV. "These deals will certainly feel some impact because a percentage of the purchase price is likely to change now that Eurostat is likely to view all DPP as equal to debt," said one Italy- based source at Dexia Crediop. But he added that the hard-line view is something that the market largely expected.
Indeed, the issue has been in the air since last September, when Eurostat started hinting at the prospect of subjecting the securitization guidelines for another round of revamping (ASR, 10/9/06). In Italy, the health-care securitization transactions were hit by the new budgetary law for the year 2007 as a consequence of a position taken by Eurostat, according to Filippo Pingue, head of the law firm Simmons & Simmons in Italy, who specializes in securitizations.
"Essentially the new provisions consider public indebtedness the amount to be paid as a consequence of settlement agreements between suppliers and health-care authorities containing postponements of the payment of the health-care receivables for more than 12 months and the assumption by the relevant Italian region of the direct obligation to pay the above mentioned receivables," he said.
"However, I would expect, also for other EU countries that have implemented health-care securitizations with a direct recourse to the competent national or regional authorities, the same treatment as for the securitization carried out in Italy," Pingue added.
If Eurostat moves ahead at the suggestion of the CMFB, Italy could see its estimated 5 billion ($6.34 billion) of health-care securitization deals executed by several of its southern regional governments tallied up as on balance sheet debt. The 5 billion would add about 0.5% of GDP to the state debt, which is the world's third biggest in absolute terms.
"As you can imagine, the way the government proceeds on how it will approach the new guidelines is a complex matter that has yet to be resolved," said the Dexia source. "Now the government will have to consider more closely the transfer of money from central to regional governments, and the new guideline may be imposing the reconsolidation of this debt."
Athanasia Tsene, a partner and the head of the banking and finance department at the law offices of M. & P. Bernitsas in Greece, said that there has been no direct development in this field in Greece. As far as regulations, like many other players in the market, Tsene expects that Eurostat will set the stricter measures for securitization, but she is not expecting it to happen shortly. And she isn't alone.
"I think that this significant amount of time is probably due to the impact of these regulations on the public accounts and the complexity of the relevant transactions," Pingue said. "I figured that both these factors require an in-depth analysis, also based on a case-by-case, i.e. state-by-state, review and assessment."
Nonetheless, Tsene said that the negative press is stalling other developments within the Greek structured finance market that are up for review, discussion and debate. "This may very well result in some delay in the securitization market, [for example] in the securitization of consignment loans and even the basic RMBS structure, but that happens with sophisticated forms of finance, when something goes wrong' somewhere, people can become too cautious," Tsene said. "But Greece is fast to forget about things, so maybe next year a bad thing will turn into a good thing being used in a good manner."
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