Italy provided yet another fiscal disappointment last week when Eurostat, the European Communities' stats bureau, revised its outlook on the treatment of a number of securitization transactions and in the process rejected the 2003 and 2004 GDP figures that the Italian government released in March.
Those estimates showed a 2.9% deficit in 2003 and 3% in 2004 - maintaining Italy's deficit within the Maastricht debt criteria, which requires European Monetary Unit nations to maintain budget deficit levels of 3% of GDP. Eurostat provisionally revised the Italian deficit for 2003 and 2004 to 3.1%. Public debt, meanwhile, was estimated at 106.5% of GDP in 2003 and 106.8% in 2004. The European Commission had forecast Italian budget deficits of 3.6% in 2005, and 4.6% in 2006, before Eurostat published the revised figures.
In 2001 and 2002, the Italian state executed two SCIP (Societa Cartolarizzazione Immobili Pubblici Srl) securitizations backed by the sale of a portfolio of buildings owned by the Social Security Funds. The majority of these buildings were rented households where tenants were given a right of first refusal before the properties were put on the market. In April 2004, the Italian parliament approved a law that allowed tenants interested in buying their apartments to pay the prevailing 2001 market price, rather than the current one. The law also granted a government reimbursement between the price paid and the 2001 price to those owners who, as tenants, purchased their apartments between 2001 and 2004, before the law took effect.
Eurostat also decided that all of the debt issued by Infrastrutture S.p.A., an ongoing private public partnership that finances the construction of a high-speed railway link between Turin, Milan, Rome and Naples, is to be recorded as government debt. The change boosted the 2004 deficit by another estimated 7.5 billion "Following close examination of the balance sheet of ISPA, it was clear that the debt issued by ISPA had to be rerouted either to [the] government or to the railway company, as ISPA is not bearing any risks in this operation," said Eurostat.
Securitizations with a government guaranty would be counted as on-balance sheet debt and a clause required the transaction proceeds to be 85% of the asset transferred - if the difference between the initial payment and the observed market price (or market-based price estimated by independent agents) exceeds 15%, the transaction is treated as government debt. In theory, the more stringent criteria would make it difficult for governments to use securitization as a tool to simply reshuffle serious debt problems.
And the rating agencies have long since cautioned against Italy's reliance on such one-off measures (see ASR 1/23/03). "Standard & Poor's does not adopt all ESA95 accounting practices," said Trevor Cullinan an S&P analysts responsible for the sovereign ratings on Italy. "Specifically, one-off receipts - such as securitizations of future flows or other receipts that lead to higher future outlays, and therefore do not improve the long term fiscal flexibility of the government - are recorded below-the-line as financing items. As a result, the estimate of Italy's 2004 deficit, as presented in our January 2005 report, was already at 3.1% of GDP (the same as the revised Eurostat figure)."
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