Securitization revisited in effort to tackle public deficit
Faced with growing difficulties in meeting its main budgetary goal of bringing the 2006 budget deficit to below the 3.0 percent of GDP threshold, Greece is about to revive the securitization of state assets it abandoned a few years ago to help close the huge budget gap. In addition to the state, banks have started making greater use of securitization to improve their balance sheets and market participants expect state-controlled companies with real-estate assets to follow suit. Despite its merits, securitization has its costs and should not be considered a panacea for all illnesses. The new likely upward revision of the 2004 budget deficit to 6.6 percent of GDP from an earlier estimate of 6.1 percent makes it harder for Greece to honor its commitment to comply with the Stability Pact and slash its deficit to below 3.0 percent of GDP next year. Caught between its need to cut the deficit and a desire to keep the economy growing strongly, the government has obviously found a way out in raising a good deal of cash to close the gap by securitizing delinquent taxes. Greece’s securitization program ceased in 2002 when Eurostat, the statistical arm of the European Union, ruled that the proceeds be added to the calculation of public debt since the originator was not completely detached from the issuer. In a typical securitization deal, the assets are transferred to a special purpose vehicle (SPV) or trust, which in turn issues asset-backed securities (ABS) to investors in order to finance the purchase. Greece had securitized receivables worth more than 3.0 billion euros in 2000 and 2001. It had received some 2.0 billion euros of future revenues from the Third Community Support Framework (CSFIII), 750 million euros of net profit receivables from the Consignment Deposits and Loans Fund, 650 million euros in state lottery receivables and 355 million euros’ worth of air-traffic receivables from Eurocontrol. The reclassification of the proceeds from securitization led to the first significant upward revision of the public debt ratio to more than 106 percent of GDP in 2000, 107 percent in 2001 and 105 percent in 2002. Bankers insist the securitization of more than 3.0 billion euros’ worth of delinquent taxes will not add to public debt because these taxes refer to the past and are not linked to future revenues like before. They also point out that there is a real underlying asset this time around. Given the size of the collateral, analysts expect the state to raise proceeds of some 2.0 billion euros or more, providing a much-needed relief for the budget. Moreover, if the proceeds are used to buy back debt, then the public debt that is outstanding goes down. Of course, all this does not come cheap since the cost of securitization is higher than the cost of straight borrowing in the capital markets. However, it allows for the management of the stock and flow of debt, it reduces the risks associated with underlying assets and in general it helps improve the state’s balance sheet. Banks follow suit Although the state was the first securitizer in Greece, commercial banks have picked up the tempo, starting with medium-sized Aspis Bank’s first-ever securitization of mortgages (RMBS) in late 2003. Constantinos Karatzas, chairman and CEO of Aspis Bank, has called RMBS securitization «a natural option for Aspis Bank, given its large mortgage portfolio.» Other Greek banks have followed suit, with EFG Eurobank’s securitization of credit cards being the most recent. National Bank is rumored to gauge the securitization of a portion of its non-performing loans and Emporiki Bank is likely to enter the ABS market for the first time in the next couple of months. Liquidity is the main driver of securitization for banks, along with the diversification of funding sources. Other advantages are the removal of illiquid assets from the balance sheet, the reduction of leverage and the freeing up of regulatory capital, which allows for better risk management. The improvement of some important financial ratios, namely the return on assets (ROA) and the return on equity (ROE), are also important drivers of securitization. Corporations next? Although the state and commercial banks have entered the fray, local corporations have yet to enter the ABS market. Bankers and analysts believe the time has come for corporations to join in and predict that state-controlled companies will be the first to do so. They expect these corporations to seek the securitization of a good chunk of their real estate and other assets, sitting idle in their balance sheet. State-controlled Public Power Corporation (PPC) is thought to be a prime candidate for the securitization of real estate assets. By doing so, companies can find an alternative source of funding, free up working capital and transform illiquid assets into tradable instruments. They also transfer risk to the holders of ABS securities, decrease leverage and improve their financial ratios. Some even see scope for the securitization of proceeds from the first wave of concession projects, such as Attiki Odos and Gefyra, although in our view this is rather unlikely, given their strong income stream. The securitization of Olympic infrastructure projects could also be in the cards if the government decided to do so given their high cost of maintenance. Undoubtedly, securitization is a useful tool with which to improve a corporate balance sheet and better match assets with liabilities. However, it is also more costly than other traditional forms of funding. Although the advantages and disadvantages differ from one corporation to the other, it may be a good idea for the state to securitize a good deal of its delinquent taxes provided the proceeds are used to retire public debt. Will it be the case or not? No one but the Finance Ministry knows the answer. Let’s hope that the securitization proceeds will not be channeled to fund state consumption expenditures but will be used to buy back government bonds to reduce the public debt and take pressure off from future budgets as well.
