The potential accounting change, so far only hinted at in a letter from Eurostat officials to Italy's national statistics body Istat, could add an estimated Eu3bn to the country's official debt figure.
This would not affect Italy's credit rating, as the rating agencies already count the securitisations as financial debt. And it need not have any direct effect on government bond prices, since it will not alter the quantity of BTPs Italy needs to issue.
But the change would be a heavy blow to the left-of-centre government of Romano Prodi, which is struggling to improve the nation's financial ratios according to Eurostat's criteria. These are used to measure compliance with the rules of European monetary union.
In 2005 Italy's national debt was the second highest in the European Union, at 106.4% of gross domestic product. Its general government budget deficit was the third highest, at 4.5% of GDP. Prodi hopes to cut Italy's budget deficit next year from 4.1% to 2.8%.
The Eurostat changes relate to the way Italian regions classify securitisations of commercial debt owed by the local healthcare entities in their region to private sector suppliers.
Many Italian regions, particularly Lazio, Campania and Abruzzo, have large healthcare budget deficits, due to soaring healthcare costs coupled with budgetary constraints at the national level. These have prevented the central government from funding the regions' healthcare deficits as they arise each year.
Without the necessary funds from the region, the local health authorities, the Aziende Sanitarie Locali (ASLs), run the risk of having to make large interest payments to their suppliers for overdue commercial debt.
This is due to an EU Directive implemented by Italy in 2002, which stipulates that interest owed after a default on a commercial debt should be set at 7% over the European Central Bank refinancing rate, unless otherwise contractually agreed.
In the last three years there have been at least half a dozen securitisations in Italian regions, designed to speed up repayment of the debts the ASLs owe their private sector suppliers.
Rather than wait until they have enough funds to pay their suppliers and face a hefty interest charge, some ASLs and regions have found it more efficient to renegotiate the debts with the suppliers over a longer term.
The region will typically acknowledge the existence of the claims and agree to repay them over time through a mechanism known as a delegazione di pagamento.
The settlement will then be funded upfront by a securitisation, in which the private suppliers sell their claims against the ASLs and the region to a special purpose vehicle, which then issues bonds.
The bonds are repaid over time as the region pays off the claims under the delegazione di pagamento.
The delegazione di pagamento helps the rating agencies view the obligations as ranking in line with or just below the region's senior debt. That allows the securitisations to be rated on a par with, or one notch below, the rating of the region itself.
The bonds are either sold to institutions that specialise in public sector risk, such as Dexia or Depfa, or are wrapped by monoline insurers and placed with capital markets investors.
So far, the regions of Lazio, Abruzzo and Campania have been most active in securitising these receivables. Total issuance amounts to Eu2bn-Eu3bn, according to one market participant, although some deals have been conducted privately.
An alternative solution, which does not involve the delegazione di pagamento mechanism, is for the suppliers to sell the commercial debts directly to a bank or hedge fund, which will then try to renegotiate the debt directly with the region.
Commercial vs financial debt
While rating agencies typically classify these securitisations as financial debt for the regions, Eurostat has historically not taken this view.
This is thought to be because commercial debts are not viewed as additional indebtedness under the Maastricht treaty, and their qualification does not change if the debt is assigned to a third party.
Furthermore, the securitisations are not directly carried out by general government, and the only fundamental aspect of the debt that changes after the securitisation is the identity of the creditor — the securitisation vehicle takes over from the healthcare suppliers.
However, in a recent letter to Istat about a deal by the region of Lazio, a Eurostat official appeared to change this view.
The letter, sent on September 4, argues that whereas the original payments owed by the ASLs are trade credits, the restructuring amounts to a long term financing arrangement, which should be classified as a loan.
Eurostat also highlights the fact that the region, by agreeing to pay the suppliers, appears to be accepting by a formal act a liability towards the suppliers.
The letter concludes that the debt restructuring "leads to [the] creation of a new instrument, most likely to be a loan". This reclassification would appear to cause the securitisation to be viewed as financial debt for the region — and hence, in Eurostat's analysis, for Italy as a whole.
The letter raises more questions than it answers. It is unclear whether the classification would apply to all securitisations structured with a delegazione di pagamento, or just the one deal under discussion.
Equally, the letter does not state whether the classification would be retroactive, and apply to all previous such securitisations, or merely to future deals.
A spokesperson for Eurostat declined to comment, saying that the agency did not comment on specific accounting issues under discussion with member states.
Delegazione may be stopped
If the classification were applied to all deals structured with a delegazione di pagamento, the central government would probably try to prevent regions from using this structure any more, since it would enlarge the national debt pile, and hence stoke up the pressure on the budget.
This, however, would deprive the regions of an important way out of a punitive debt trap.
Standard & Poor's also points out in a report that classifying the securitisations as debt could raise legal problems for the regions, as the deals would be deemed to be in breach of Article 119 of the Italian constitution, which states that regions cannot use debt to fund operating expenses.
Last Friday Standard & Poor's placed the ratings of Lazio (A-), Campania (A-) and Abruzzo (A) on CreditWatch Negative, due to their mounting healthcare deficits.
It said removing the CreditWatch would depend on the government's strategy for restructuring the healthcare sector in the regions over the next three months and any additional support it might grant the regions to help resolve their structural imbalances.
The agency added that ending the watch "hinges on how the government addresses the legal risk on outstanding securitisations through a clarification of the national legislative framework".
Some market participants are confident, however, that this will not spell the death of healthcare securitisation in Italy.
Some deals have been structured without a delegazione di pagamento. Campania introduced a framework in 2004 under which the region authorises the ASLs to reach a settlement with healthcare providers, and agrees to reimburse the ASLs for payments agreed under the settlement.
However, the framework only gives the owner of the claim recourse against the ASL, rather than the region.
Another option is for the private suppliers to sell their credits to a bank's principal finance group or hedge fund, which can then negotiate its own settlement with the ASL or region.
It may be possible to securitise this kind of claim and get an investment grade rating — Fitch has already published a methodology that includes deals that do not benefit from a delegazione di pagamento.
But one banker argued that most such deals would probably be caried out privately, and on a principal basis, rather than through public issues.
There would be a heavy irony in Eurostat taking a harsher line on these transactions by classifying them as debt. Having the obligations in debt-like form, as a securitisation, is much better for the regions than leaving them as they are, carrying high interest and open to being bought up by hedge funds.
Neil Unmack
