European statistical office Eurostat, said last month that it was in the process of revising its ESA95, the accounting criteria for government related securitizations. But even with the possibility of adapting to more stringent criteria, governments will have to find a way to incorporate securitization as a method to deal with borrowing deficits, market sources report.
Since it lowers financing costs, countries facing mounting deficits are looking at ways to incorporate securitization to better manage their balance sheets. "We've seen this accelerated growth in Europe where [EU] countries have borrowing limits that some countries have breached or are getting close to [breaching]," said one market source. "All of these countries want to be seen as borrowing less, which means that potentially any country would be looking to securitization to comply with requirements," the source added.
The Italian government - one of the more sophisticated, if not the most prolific issuer - has set an example of just how far the use of securitization can go even within the tightening limits set by Eurostat. Over the years Eurostat has set a number of accounting regulations to deter governments from relying too heavily on these one-off measures as a long-term means to tackle growing deficits. More recently it said that it would further define the treatment of these deals following Germany's postal pension deal. The German government expected the deal to reduce debt, but last month's Eurostat clarification classifying it as government debt means that Germany may assume an extra 5.5 billion ($6.57 billion) of debt, amounting to nearly 0.3% being added to the 3.7% budget deficit it had previously submitted to Eurostat (see ASR 10/3/05).
Amid Eurostat's pledge to introduce more clearly defined criteria, Italy and Greece have both announced plans to issue future deals and Belgium is also looking to have its tax package counted against its borrowing deficit. Greece initially said in October that it planed to securitize 3.8 billion of tax debt as a supplementary measure this year in order to reduce its deficit to below the EU cap of 3% of GDP by 2006. Greece's deficit totaled 6.60% of GDP in 2004. But the Greek Finance Minister announced last week that he would reduce the amount of securitization planned for this year (from 1.8 billion to 1.5 billion) and next (from 2 billion to 1 billion) and resort to more permanent spending cuts instead.
"This is a positive move in terms and follows comments from S&P on the fact that such one-off measures do not address the underlying structural weakness of the public finances," said Trevor Cullinan in Standard & Poor's Sovereign Ratings group. "Eurostat also suggested that they may not accept the measures proposed for 2006, suggesting the possibility of a tougher stance on such one-off measures, but we'll have to wait and see."
European Monetary Affairs Commissioner Joaquin Almunia reiterated last month in a press conference that Eurostat would have a final say on how the issue would be treated. He also told the conference that while Eurostat understood that Greece would adopt this one-off measure to account for shortfalls in revenue in 2005 it would ultimately be up to Eurostat to judge if these measures are ESA95 compliant. Almunia said that the EU's Executive Commission would assess in November whether Greece was taking adequate measures to cut its deficit to below the EU limit.
"The German pensions deal has been highly controversial because it didn't look like a securitization at all but I think the problem in some of these jurisdictions is that the use of these one-off measures are less politically accepted than say in Italy," said one market analyst. "The Belgium tax deal took some time because politically there was a lot of opposition. On a practical level these governments, without being assured of the fluctuation of the interest rate environment, can find some room to maneuver in securitization."
Even if Eurostat steps in with more stringent criteria, it is unlikely that governments will step away from the allure of securitization. "ABS transactions allow states some flexibility to raise funds without increasing government deficits. However it depends on what assets are available for securitization. And the proposed specific guidelines would improve clarity for [those] examining possible transactions from government sponsors," said one market source. Recent deals like the German pension securitization saw significant time consumed to examine Eurostat issues - clear prescriptive guidance would reduce this overhead.
"Government budget and funding requirements are likely to drive transaction volumes alongside the availability of suitable assets," said one market analyst. "Going forward, deals such as overdue tax or social security transactions with heavy overcollateralization are unlikely to be allowed unless market-value calculations are permitted. Eurostat is also unlikely to include financing for deals backed by future government revenues, or where other implied guarantees exist," the source added.
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