Securitization: Creative government accounting or a threat to real fiscal information collection?

BRUSSELS – Innovative ploys that Italy and four other European countries are using to flatter their budget figures could be outlawed within months, forcing them to take more lasting measures. Austria, Finland, Greece, Ireland, and Italy, the eurozone’s third-largest economy, have used assets or revenues generated by assets as security to raise money without the debt or interest payments showing up on the debit side of their books. Firms have long used this strategy, known as securitization, but it is a relatively new tactic for European governments. As more of them latch on to the idea, a task force which includes officials from the European Union statistics office want to spell out what is permissible and will issue guidelines by July. The decision is especially critical for Italy, the only one of the five to run a deficit last year, and the country is counting on securitization income to wipe it out by 2003, something it has promised in its medium-term budget plans. If it is barred from using some of its securitization income for this purpose, as European Monetary Affairs Commissioner Pedro Solbes said on Monday might be the case, it will have to come up with new ways to balance its budget while keeping to that timetable. «It is good that governments use new financial techniques to manage their public finances more efficiently, but there has to be more clarity, so this is an early reaction by Eurostat,» said Gerassimos Thomas, Commission spokesman on economic affairs. «Italy is advancing toward a balanced budget with a mix of structural and one-off measures, but may have to reconsider the balance between the two, depending on Eurostat’s decision,» Thomas said. Tough calls Analysts do not expect a blanket ban on using securitization income to make budget balances look better, but said some deals were more likely to be waved through than others. For example, Italy has sold bonds backed by the future sale of public property and others backed by revenues from the state lottery. Meanwhile, Greece has securitized, among other things, structural funds it expects to receive in the future. «To date, Italy has only securitized non-core assets and not given any guarantees,» said Andrea Wehmeier, public sector credit analyst at Dresdner Kleinwort Wasserstein. «This means it is probably in a better position than, say Greece, where government securitization includes very strong obligations by the Greek State to keep things working if there are not enough proceeds.» The EU statistics office has plenty of practice in making tough calls about what governments are allowed to count when it comes to figuring out their budget balances. «There were various elements of creative accounting in the runup to monetary union and questions over certain practices,» said Gwyn Hacche, economist at HSBC in London. For example, France used pension-related payments from France Telecom to cut its deficit to levels required for euro entry in the runup to the monetary union’s 1999 launch – a tactic criticized by the Bundesbank but deemed acceptable by the EU. EU sources insisted that this time, as before, the final decision would be free from government interference, even though national officials will have some input. Laying down guidelines Furthermore, analysts said it is vital to pin down rules before governments get too carried away with securitization. «Otherwise, you could see not-too-positive developments. Italy has been securitizing non-core assets but is considering a tax securitization, which would reduce current revenues and budget flexibility,» said Dresdner’s Wehmeier. Italy will already find it ran a deficit of just under 2 percent of its output in 2001, rather than that of 1.4 percent, if it is not allowed to include income from real estate securitization and securitization of state lottery revenues. Being barred from using even some of these revenues could throw it off its charted course for balancing the budget. «We think Italy will balance their budgets in 2004, a year after they have scheduled and if the decision goes against them, you could add another year to that,» said Nick Eisinger, a director at Fitch Ratings in London. That may not go down well with the European Commission, which has already said it would have been tougher on Italy and its budget plans if it had known then what it knows now. However, on the bright side, this might focus the Italian government’s attention on the reforms it needs to make in its labor market and the pension and health systems, analysts said. «For the last few years, Italy has come up with these sorts of securitization deals which have propped up their revenues,» said Luc Marchand, an associate at credit ratings agency Standard & Poor’s in London. «If they keep doing these one-off measures without decreasing public expenditures in the long term, they may achieve a balanced budget at some point, but the decline in the deficit will not be sustainable and that is what is really important for us.

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