With virtually no regulatory uniform, the slate of European government-related securitizations (see ASR 12/03/01 p.1) that left its imprint on the record-breaking volumes of 2001 continue to be indecipherable in terms of risk weighting; but even more importantly, without any direct guarantee attached to past issues, the question arises, how state-related are these deals?

"Most of these deals that we have seen to date should not even be called government debt because they are not," explained one analyst. "You would have to call all bank deals, bank deals' and that would have to include RMBS and CDOs [because] at the end of the day these are either securitizations of consumer debt or corporate debt. The state-related deals are not very different, as they either securitize consumer or corporate debt and sometimes may benefit from a government undertaking."

To date the Greek government has been the forerunner in structures that include the government undertaking responsibility to put the issuers in a position to pay. "In terms of Greece, as far as the information we have gotten, they will be off-balance- sheet," said the analyst. "Obviously you have an undertaking on these deals which makes them, in shortfall, an undertaking of the Greek government. You might want to obviously say if they are almost guaranteeing this then it can't be debt relief.

"The problem is - or perhaps not a problem, which is the reason everyone is trying to do this - is that there are no rules that make these securitizations clear-cut. It is very much the European Union saying we accept this and we accept that - it's their decision whether they view it as off-balance-sheet or on-balance-sheet - so it's very difficult to formulate a rule here."

Further, a government's role as undertaker does not necessarily position a deal to include government debt primarily because in such cases the government is not obliged to substitute an issuer default. "So basically as an investor you can't turn around to the Greek government, if there are any shortfalls and say, You have to pay now,'" added the analyst. "You would have to turn to the insurer and say Listen, we want our money now,' and the insurer would turn to the Greek government, who only undertook to put the issuer in a position to pay but by no means did they assume total obligation."

State guarantee?

However, the fine line of where the EU draws off-balance-sheet consideration is highlighted by last year's inclusion of Austria's Blue Danube deal, which may explicitly guarantee the deal. If the EU views it as off-balance-sheet debt, it would be a first; more importantly, it signals the forward trend of such state-related deals. "Unlike Italy and Greece, who are largely motivated to comply with the Maastricht criteria, Austria doesn't have any problems with high debt," said the analyst. "What they wanted is a balanced budget and that is how they are trying to achieve it."

The Austrian deal also marks the first regional government securitization, as opposed to central-government involvement. Many countries will likely turn to securitizations as a means to decrease debt burden. "Italy is one of the countries where we might not see central-government involvement but instead the regions are looking more closely at securitization, which may bring real state securitizations then," said the analyst. "What they would be doing is securitizing future payments due from the central government, whereas what the central government has been securitizing are payments due by the Italian residents or smaller companies, [and] by no means are these really state deals."


According to Morgan Stanley in its European outlook for 2002, the growth of the Italian market increased to $25 billion last year from $7 billion in 2000. Italian transactions accounted for 20% of European supply in 2001. "Looking into 2002, we expect this trend to continue with more government-sponsored transactions," explained Morgan Stanley. "Other countries would rather take one-off issues to either privatize certain areas and raise the funding privately rather than publicly, because obviously what they don't want to do is increase debt burden, similar to the private funds initiative in the U.K."

As government-related securitizations seem poised to continue, the Morgan Stanley researcher pointed to the confusion surrounding risk weighting for these deals. Transactions so far have either seen 100% risk weighting, sometimes 20% or even 0%, depending on who the obligor is and how they treat undertakings. "You ask yourself, Why are they being treated so differently?'" the source said. "And if you ask the supervisory authority, like the Bank of England or the Bank of France - they all say different things, so it's quite frustrating."

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