Eurostat, the statistical office of the European Union, said it intends to further clarify the rules on securitization operations in its ESA95 manual on government deficit and debt, following the numerous problems that have arisen interpreting existing rules - in particular, the guarantee provisions and risk transfer benefits for EU member states.

In a statement issued last week, Eurostat said that its tweaked ruling could lead to changes in data reporting for some member states in next year's March notification. Last week Eurostat provided the government debt and deficit data based on figures reported in the second notification period this year by EU member states for the application of excessive debt procedures calculated between 2001 through 2004.

The notification is based on the existing ESA95. In July 2002, Eurostat drew up this regulatory framework for government securitizations and several existing transactions were ruled illegitimate (see ASR 7/15/02). The rule also diminished the benefits for future-flow structures provided for EU members and also put conditions on how government a guaranty could be treated, capped the amount that assets can be discounted prior to sale at 15%, and limited the cash value that governments can realize to the sum of cash the SPV pays to the government.

Italy and Greece, which between the two countries dominated this sector before ESA95 was ratified, saw a total of 12 billion ($14.4 billion) from a series of future-flow deals issued prior to the ruling, return to their respective balance sheets. The more stringent criteria, while curbing appetite for certain types of deals, did not serve to stop the use of securitization as a measure to offload government debt.

But last week's announcement on Eurostat's intended ESA95 ruling revision, expected "as soon as possible" means that the expected debt and deficit recently reported by some member states may undergo further examination. Italy has already seen the transaction issued by Infrastrutture SpA - an ongoing public/private partnership financing construction of the high-speed railway link between Turin, Milan, Rome and Naples - was ruled as government debt (see ASR 6/6/05).

Germany is the latest EU member state to come under scrutiny following its securitization of pension-fund contributions by the former Deutsche Bundepost, now Deutsche Telekom, Deutsche Post and Deutsche Postbank issued this summer (see ASR 6/7/05). The government expected the deal to reduce debt, but last month's Eurostat clarification - calculating it as government debt - means that Germany may assume an extra 5.5 billion of debt, amounting to nearly 0.3% being added to the 3.7% budget deficit it had previously submitted to Eurostat.

"The [German pension] securitization, priced in June, is essentially a monetization of future pension-related payments due to the German government from Deutsche Telekom and Deutsche Post," said Deutsche Bank Securities analysts. "The deal effectively lowered 2005 fiscal year pension payments due from the German government, which assumed the pension liabilities of these companies. We understand that the German finance ministry has commented that the Eurostat ruling would not lead to a revision of its budget deficit forecast for 2005."

Eurostat said it intends to clarify reported cases of capital injections undertaken by governments between 2001 and 2004 in Italy, Germany, Poland and Portugal and expects these revisions to be in place by next year, following provision of information on such cases by member states.

According to figures released by EU member states, in 2004 the largest government deficits by percentage of GDP were recorded by Greece (6.6%), Hungary (5.4%), Malta (5.1%), and Cyprus (4.1%). Another eight member states recorded a government deficit over or equal to 3% of GDP: Poland (3.9%), Germany (3.7%), France (3.6%), Italy (3.2%), Slovakia (3.1%), U.K. (3.1%), the Czech Republic (3.0%) and Portugal (3.0%). Five member states continued registering a government surplus in 2004: Denmark (2.3%), Finland (2.1%), Estonia (1.7%), Sweden (1.6%), Ireland (1.4%).

In all, 16 member states recorded an improved public balance relative to GDP, while eight reported a worsening balance.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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