After several rounds of revisions, Eurostat revealed its final rules on the treatment of European Union members' state-related securitizations last week. The EU's statistical body now views all securitizations as borrowing on the part of governments and said that these operations should not be considered as reducing public deficit.

Italy, Belgium and Portugal have initiated programs over the last two years. Italy priced extensive debt transactions that typically center on regionally controlled healthcare receivables. Portugal and Belgium securitized of tax claims. Greece is on the sidelines with a possible tax deal that has yet to come to fruition.

Eurostat stated that over the years, it has observed cases of securitization operations, which have led to "uncertainties" whether the recording in national accounts was in line with the general principles set out in the European System of Accounts (ESA 95).

Securitization operations carried out before 2002 had no guidance provided in the national account manual. From 2003 to 2006, member states undertook securitization operations on the basis of specific rules set by Eurostat in 2002. The new rules complement and amend the decision taken on the same issue in 2002 (ASR, 07/15/02), which will continue to be applied to operations of this kind undertaken between 2003 and 2006. The new rules apply only to securitizations carried out from January 1, 2007.

Under the new rules, all securitization of fiscal claims by governments should be treated as government borrowing. The existence of a deferred purchase price clause or similar arrangements should lead to the classification of the securitization operation as government borrowing because such arrangements imply that not all risks and rewards of the transaction have been transferred from government to the purchaser of the assets. "This would be an indication that the purchasing unit does not have the full economic ownership of the assets acquired," the Eurostat said. "The existence of the DPP clause contradicts the basic assumption that ownership of the assets by a unit means that future rewards associated with the ownership is retained by the same unit."

Eurostat said it considered deals to be on the balance sheet if a clause in the contract refers to the possibility of substitution of assets or stipulates ex-ante government compensation to the unit. A transaction will also be reclassified as government borrowing if the government compensates (in the form of cash, for instance, of a debt assumption, or of a direct or indirect guarantee) the unit ex-post for specific events, even if the compensation was not originally foreseen in the contract. This reclassification would ultimately affect the surplus/deficit of government in the year in which the compensation is decided.

In the future, it will be important for member states to affect clear rules at the individual government level that implement the new, more detailed Eurostat rules. "In principle, national accounts practice favors backwards correction of series, in order to maintain homogenous time series, when new concepts are designed or new rules established," Eurostat said. "It is also good statistical practice to ensure an implementation of the changes which maintains maximum comparability between EU Member States."

In Italy, the healthcare securitization transactions have already been hit by the new budgetary law for the year 2007, which brought Italy's national position in line with the position expected to be taken by Eurostat. The new provisions under Italian law considered public indebtedness the amount to be paid as a consequence of settlement agreements between suppliers and healthcare authorities containing postponements of the payment of the healthcare receivables for more than 12 months and the assumption by the relevant Italian region of the direct obligation to pay the above-mentioned receivables.

And it's expected that other EU countries that have implemented healthcare securitizations with a direct recourse to the competent national or regional authorities will implement on a national level the same treatment for securitization as has been carried out in Italy.

As a result, governments will now have to consider more closely the transfer of money from central to regional governments. If these new guidelines were applied retroactively, the result would be that the recording of fiscal policy measures designed in good faith according to the 2002 rules would have to be reconsidered, Eurostat said. It could lead to the reconsolidation of this debt. Under such a scenario, Italy could expect to see an estimated 5 billion ($6.34 billion) of healthcare securitization deals from several southern regional governments tallied up as on balance sheet debt.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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