As state regions and municipalities within Europe increasingly embrace securitization as a financing alternative, a new debate has emerged over the fiscal and administrative relationship between central governments - which conduct their own transactions - and regional governments/municipalities, who are eager to maintain control over their own independent deals and expenditures.
The central governments, or states, are inclined to have these local entities removed from the concept of broader public administrations debt; alternatively, if the regions do remain under the auspices of the state, the central government would like to at least exercise some form of control over the expenditure of these entities.
Under the rules designed by Eurostat, the statistical office of the European commission that provides information to the European Union, the debt of local governments or municipalities is considered to be part of the state for accounting purposes only, explained Paolo Calderaro, a partner at the law firm Clifford Chance.
In essence, the state would like to ensure that these local entities, through securitizing their assets, do not deprive themselves from local revenue over the next 10 years.
The pressure to arrive at some definition may be linked to a growing interest on the side of municipalities or these regional governments to conduct more securitizations. These municipalities have recognized securitization as a great new form of funding and fear that under current regulations they may be poised to lose some measure of control.
This is not the case in Italy, however. In that country, the national treasury continues to express its interest in what the local government does in terms of securitization. In 2001 the first Italian regional deals were launched in a series of four transactions labeled Cartesio 2001 Srl, out of the Region of Lazio. However, the deals are not considered to be true securitizations because there is no legal sale of assets.
Many market players, however, claim that the Italian scenario does indeed set a precursor for what role the central government plays within these local transactions. Under the terms of the loans the notes are rated based on the guarantee provided by the Republic of Italy, making the central government the ultimate obligor, but note holders only have access to the Region of Lazio should there be any shortfall.
In some municipalities there is a drive to have these entities a few steps removed from the central government in terms of liability issues, explained one market source. "I get a sense that if it is actually going to be tested somewhere it might actually be in Eastern Europe - the Czech Republic, Hungry or Poland," said the source. "These countries don't have the history, the assumption that has underlied the relationship between central government and municipalities. From a legal perspective, in Eastern Europe, those traditional relationships aren't really there and there is a lot more that is left to question."
The assets
As for potential assets that can be securitized by both central and regional governments, it is important to look at what has been done already; to date the market has seen lotto and social welfare payments securitized in Italy, and airspace rights in Greece. Some sources say that governments may also have substantial real-estate assets that can be used as collateral. Additionally, less developed countries might have substantial mineral resources that could be another alternative.
"Think about the possible assets that could be good candidates for securitizations," said Vas Kosseris, senior director of European structured finance at Fitch. "These assets have to be homogenous, of a high total value to make large issuance feasible, because with all the costs involved the larger transactions are more cost-effective. Also they have to be assets that are clearly the government's and thus there is no question of ownership."
Italy continues to show large potential and has already slated a return of its EURO5 billion portfolio of real-estate assets, which follows the EURO2.3 billion transaction that came to market on December 21, 2001. Regional jurisdictions are expected to turn to the option as a tool. Michael Raynes, managing director at Deutsche Bank, said: "It may not necessarily be applicable to every jurisdiction. The [Italian real-estate] deal was large in size and from both a structuring and marketing perspective it had never been done before. Given its success, we expect this will be a growing ABS market sector."
But decentralization is not a theme that is rampant throughout Europe, explained one analyst who lists Spain and Germany as two countries which seem to almost have taken the opposite approach. "This trend to move away from the central government just started in Europe and now Spain and Germany are both taking the opposite route, where we see the region aligning closely with the central government," said the source.
The European Securitization Forum plans to address the benefits securitization provides to governments in a prepared report slated for release in May. The organization cites the reason behind developing this commentary as "the increasing trend of governments using securitizations."
