Ch. 11.10 Securitisation undertaken by government units GFS course ch. 13.5.5 Ch. 11.10 Securitisation undertaken by government units GFS course 2014 1

In this session What is securitisation GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 In this session What is securitisation History of government securitisations 2002 rules 2007 rules GFS Course 11.10 2 2

What is securitisation? GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 What is securitisation? A financial innovation from the 1980’s in UK and USA and in the 1990’s in mainland Europe. Basic principle: borrowing by transforming illiquid assets into liquid assets Most frequently used by banks through a specific entity (Special Purpose Vehicle, SPE) From vanilla securitisation to more complex arrangements Played a part in 2007- financial crisis GFS Course 11.10 3 3

What is securitisation? – Conventional bank securitisation GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 What is securitisation? – Conventional bank securitisation Bank legally transfer some underlying “assets” (typically rights to mortgage income) to an SPV. SPV then issues asset-backed securities (usually bonds) to the market. SPV uses proceeds to settle the purchase of “the securitised assets” from the bank. GFS Course 11.10 4 4

What is securitisation? – Conventional bank securitisation GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 What is securitisation? – Conventional bank securitisation Mortgages provide ideal securitisation material as the assets are backed by property and produce a steady income stream to repay the bonds. The securitisation allows the bank to bring forward these future income streams, which it can use to fund new mortgages. GFS Course 11.10 5 5

The first problem – the SPV GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 The first problem – the SPV SPVs differ from institutional units usually included the National Accounts They will often have no employees and little economic activity Little physical presence beyond a brass plate confirming their place of registration and are often resident in a different territory from the related corporation (tax havens) Usually structured for tax avoidance and to minimise liabilities in the event of any bankruptcy. GFS Course 11.10 6 6

The first problem – the SPV GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 The first problem – the SPV Is it an institutional unit? An economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities. ESA95 paragraph 2.55f, in defining S.123, includes "financial vehicle corporations, created to be holders of securitized assets". GFS Course 11.10 7 7

The first problem – the SPV GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 The first problem – the SPV Although not formally a subsidiary, effectively borrowing vehicle for originator When fail they usually end up on originator’s balance sheets When SPV established by, or serving, government the MGDD guidance suggests fails 2.12 hence part of GG (re-route when non-resident) GFS Course 11.10 8 8

Governments using securitisation GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 Governments using securitisation Mainly Italy and Greece (to 2001, 73% and 27%) “If a government wants to cheat, it can cheat” - Garry Schinasi, International Monetary Fund’s capital markets surveillance unit. Italy, €39.8bn, mainly after 2001 2001 Lottery receipts (state guarantees prize fund) SCIP (social housing) Social security arrears GFS Course 11.10 9 9

Governments using securitisation GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 Governments using securitisation Greece €3.8bn, investment bank advice, SPVs in Luxembourg, government guarantee 2000 Hellenic (dividends from Consignments & Loan Fund) 2000 Ariadne (lottery receipts) 2001 Atlas (EU grants) 2001 Aeolos (CAA), then used off market currency swaps GFS Course 11.10 10 10

Governments using securitisation GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 Governments using securitisation Also cases in France, Germany, Portugal, Belgium, Austria Various “assets” securitised: including tax and social contribution claims, loans, future revenue etc. Economic analysis: “one-off” cash receipts, no long term improved sustainability of public finance? GFS Course 11.10 11 11

2002 - Eurostat takes a first decision GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 2002 - Eurostat takes a first decision No clear-cut treatment in ESA95 Lack of information from MSs to Eurostat Eurostat decision 3 July 2002 fixing conditions: 1. No sale of future revenues (assets generating future flows must pre-exist in Government balance sheet) 2. Guarantees => incomplete transfer of risk (“True sale” notion) 3. Sale price not below 85% of fair/market price (“Deferred Purchase Price”) Some data needed to be revised. GFS Course 11.10 12 12

GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 2003-2005 New cases Portugal SAGRES tax & social contributions had “ghostly” claims (substitution issue) The Italian case SCIP: tenants protest (2004 Law compensated SPV for losses) Other cases: insufficient guidance Eurostat doubts on effective full transfer of risks, and off balance sheet borrowing GFS Course 11.10 13 13

2007 – second Eurostat decision GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 2007 – second Eurostat decision Stronger restrictions to securitisation by government units: No deficit impact from securitisation of fiscal claims No DPP at all No substitution of claims No “contingent” support mechanisms (full risk transfer once and for all!) GFS Course 11.10 14 14

GFS course ch. xx GFS course ch. 13.5.5 22/09/2018 2010 – MGDD MGDD10 V.5 had an improved description of a complex subject, now in ESA10 2009 EC regulation bans credit institutions from investing in securitised bonds unless originator exposed to at least 5% risk (last tranche) Couldn’t impose rules on originators, as many SPVs outside EU territory This effectively kills government securitisation GFS Course 11.10 15 15