1. Ch. 11.10 Securitisation undertaken by government units
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Ch Securitisation undertaken by government units
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2. In this session What is securitisation
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In this session
What is securitisation
History of government securitisations
2002 rules
2007 rules
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3. What is securitisation?
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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 financial crisis
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4. What is securitisation? – Conventional bank securitisation
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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.
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5. What is securitisation? – Conventional bank securitisation
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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.
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6. The first problem – the SPV
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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.
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7. The first problem – the SPV
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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".
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8. The first problem – the SPV
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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)
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9. Governments using securitisation
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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
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10. Governments using securitisation
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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
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11. Governments using securitisation
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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?
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12. 2002 - Eurostat takes a first decision
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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.
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13. GFS course ch. xx
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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
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14. 2007 – second Eurostat decision
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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!)
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15. GFS course ch. xx
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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
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