Asset - backed securitization: how to collect financial resources for the infrastructure of public utilities on securities markets.

In your essay, “Structured Finance”, you analyse one of the financial levers which has had a major application on international markets: securitization. Is there a reason why this instrument has had a limited utilization in Italy?
We are talking about both a complex financial instrument and the Italian legislation which, until 1999 with the emanation of law no. 130, had impeded the adoption of certain opportunities connected to the transfer of assets and, subsequently, also to the transfer of future monetary flows. This is one of the main causes for the limited application of the financial lever of securitization. Another reason is to be found in the destructuring of the large number of dormant assets in the portfolio of our credit institutions.
The big securitization operations have been finalized to the clearing, that is to the restructuring of the balance sheet: the large banks had to remove their assets at risk of default and transfer them to placing agencies, that is to the securitization companies. In this manner, the banks could free the reserve holdings imposed by the Banca d’Italia in order to finance new initiatives and, above all, with the restructuring of their balance sheets, to undertake new business opportunities.

In your opinion, could structured financing be a feasible solution for the reduction, at least in part, of the public debt through the privatisation of some investments?
Of course. Structured finance has been conceived, in its real application, to create works of public interest, and therefore not those defined as “non performing”, that is without a real cash or asset viability return, but “performing”, as defined on the Anglo-Saxon market. I mainly refer to those works of public utility which later generate an apportionment:
hence motorway tolls, water distribution network bills, telephone bills; but tickets and subscriptions to football stadiums as well as health prescription charges could also be surmised. In these days the Government is studying the finance act, the main law which has to be approved each year in order to put in the budget the commitments made by the Public Administration for the next financial year. Undoubtedly, the possibility of deducting from the economic-financial commitments of the Italian Government an amount of great relevance, destined to works of public utility, would ease the weight of public debt. Furthermore, being able to increase the number of new works, would automatically increase the GDP as new job, development and growth opportunities would be created spontaneously. The improvement of our motorway network, our ports, our airports signifies promoting tourism and exports and these would positively affect our gross domestic product. The GDP is weighed down by the public debt. I wish to recall that each year we pay between 65 and 70 billions of euro in interests on the public debt. These figures are extremely important, without mentioning all that which could be made available if the public debt were to significantly drop down below the famous Maastricht parameter, established beyond 100% and fixed at 103%. Our great European competitors, in particular France and Germany, have a public debt/GDP ratio which varies between 70-80%. This strong decrease in the deficit ratio, public debt/GDP, renders relevant resources available to be directed toward the revival of the economy, social costs, all the interventions in support of the Kyoto protocol. Certainly even securitization, or structured finance as it would be better defined, can give its contribution to the abatement of this deficit ratio and toward the attainment of those virtual parameters set out by Maastricht which should be, in my opinion, of at least 30 percentage points lower than the public debt in relation to the GDP.

What is the importance of the rating agencies within a securitization operation? What is their level of reliability in relation to the recent events of the global financial market?
Rating is one of the fundamental pillars of a securitization operation. Briefly, the following figures move within this area: the Originator, that is the person who issues the cash flow that must be subsequently securitised or structured; the advisor and the arranger which jointly put together the operation and place it on the market. The real and proper instrument is, however, a “Special Purpose Vehicle”, better known as a securitization company. The rating is issued by a third company, worldwide only the following three are normally taken into consideration: Standard & Poor’s, Moody’s e Fitch: which are the point of reference for credit ratings for the issuance of stocks and bonds. Risk assessment is very important as the better the rating the higher the interest in buying that stock, that bond. Even when a rating agency gives a higher risk rating to bonds issued against a securitization operation, the money market will buy those assets as a higher risk ensures a higher gain. These three large rating agencies are, generally, healthy companies, which assess their capacity of staying on the market on the basis of the reliability and soundness of their judgements. Their management is of a very high quality and, very often, comes from previous experiences in the field of financial markets, merchant banking or, in some particular cases, private banking; they are, therefore, operators with a very high professional and moral value. Obviously, “bad apples” can be found in every company: see the Parmalat scandal with the famous bonds issued by all the companies of the group belonging to the Tanzi family, where not only the ratings were often altered by also the inspections and controls carried out by the auditors. The rating agencies are, generally, very professional and sound companies, however it is not possible to have guarantees on everyone’s ethics.

In view of the international economic situation, what is your forecast on the GDP performance of our country?
The GDP rate influences our politicians, the industrial world and every single citizen. Taxation, growth or reduction of the country’s richness, the public debt are calculated on the basis of the GDP. The public debt is borne by every citizen, rich or poor, as this is a debt which is divided pro quota: suffice it to say that even a newborn is expected to virtually meet his quota part of this debitory amount. The estimates made by the current majority government, the Prodi Government, talk of an increase for the year 2008 of between 1.7-1.8%. Personally, but I share my assessment with the Governor of the Banca d’Italia, Mario Draghi, with the President of the European Central Bank, Trichet, with a number of analysts who have more experience than me, I believe that the forecast should be around 1.7-1.8%. Obviously, the individual citizen considers a difference of 0.3-0.4 percentage points as infinitely small, but in fact it consists in a difference of hundreds of billions of euro, monetary amounts which are not perceptible to the ordinary person. Even this difference of approximately half a percentage point lower will negatively influence the economic trend of our country and, above all, the revival and social welfare.

With regard to the American real estate mortgages, can we, in your opinion, talk about a new speculative bubble?
It is beyond doubt that there has been a speculative bubble which has also burst. We assisted, at the end of the last century, to the deflation of the net economy which has, however, left on the market giants such as Microsoft, Google, Amazon and other big companies from the Web world, all born with the net economy speculative bubble and become large and international within the same. We have currently seen the collapse of mortgages, granted too easily by the American banks, the so-called “mortgages subprime” concept. These mortgages have been practically ladled out: the client, in fact, has been drawn in undersigning them while the same disbursing bankers were aware of the difficulties which they would be facing in repaying them. When this happens to a single United States or Italian citizen, the economic productive system or the credit banking system are not destabilized. But when this happens to tens of thousands of citizens, this entails the recovery on the part of the judiciary system of those properties for which, unfortunately, the owners have not respected the commitment made with the disbursing mortgage agency. The mortgage thus becomes a marketable good. What happens in this case on the real estate market? Generally mortgages are granted for 50, 60, 70, and at times 80% of the entire value. When the bank withdraws the property, it does not attempt to recover the marketable good, but rather only the value of the credit it vaunts on the property, which is approximately 50%, and in some cases 60 or 70%. As the credit institution which granted the mortgage must only retrieve its own quota, thousands of properties are auctioned off below their marketable value. This creates a devaluation of the entire property market, people tend to buy those properties which are subject to a judiciary procedure rather than those at full value, and when the properties number more than a thousand the market suffers accordingly.

What relation is there between the bursting of the speculative bubble and the stock options mechanism, object of the Wall Street scandal at the beginning of the year?
The stock options market is, in point of fact, not known in Italy. The stock options are shares issued by companies which employ top managers and which, other than the work contract with relative wages, offer them a type of virtual “carrot” : when the manager attains results he can, after an x number of years, receive these shares which will have an adequate value. This type of job market does not exist in Italy, it is something that we look at from a certain distance. The speculative bubble is not generally influenced by the stock options mechanisms as, even if innumerable contracts are made based on the stock options formula, they are in any case only minimum quota parts in relation to the abundance of shares placed on the market. It is, therefore, difficult for this market to have a large impact on the speculative bubble even if financial markets receive inputs from every sector: politics, importations, etc.

If you were the Minister of Economic Affairs, what would your priority targets be in the current scenario? Our newspaper has founded a committee for the promotion of abolition of taxes on overtime pay (www.detassiamolostraordinario.org): from the fiscal aspect, do you consider this initiative useful?
I’ll start by talking about detaxation. Detaxation of overtime will certainly act as a disincentive for many managers when looking for a second job. In Rome, where many work in the Public Administration, many public managers, underpaid, look for a second afternoon job, as the working hours of their first job make this feasible. Considering how low is the quota paid by the worker and, therefore, the tax rate, detaxation of overtime would motivate these employees, functionaries and managers towards a greater attachment to their priority job. This would eliminate arrears in many Public Administration jobs.
I would, therefore, be favourable to this type of taxation choice. We all know, however, that taxation in Italy is unjust, especially indirect taxation, as it hits everybody in an unequal manner. In fact the excise duties on petrol, VAT and many other taxations such as the tax on passports – we are the only country in the world to have such a tax – are even more unjust, as they hit the wealthy and the poor in the same manner.
I want to close with this hypothesis, fortunately entirely virtual, otherwise the country would go to the dogs: if I were the Minister of Economic Affairs I would have as a priority target the abatement of the public debt. None of us really considers that the “company of Italy” is living beyond its means, we do not have this perception as in the evenings the restaurants are full, we all have mobile phones, we all go to the cinema, and I am happy for this general wellbeing. The country is, however, going through a period of great tribulation. This year we have assisted in the failed auction of Alitalia, failed because the Minister of Economic Affairs Padoa Schioppa – and I am sorry to say this because he is one of the more illuminated economists and a person of great value – did not manage to formulate an auction acceptable to prospective buyers. We saw a series of important desertions: the same prospective buyers who withdrew from the auction have now come forward again, today that the new managing director of Alitalia has a free hand in the sale of the company. This goes to show how the auction wasn’t managed in an appropriate manner. But an even greater problem is faced by the State Railways: a modern nation can live, I am sorry to say, without a national flag airline – other companies can use our air routes – but on our rails only Trenitalia and the State Railways can travel. These, however, have an incalculable deficit, and have problems concerning management, daily cleaning, dissatisfaction, delays. If we stop the trains we prevent people from going to work: I’m not referring to the Intercity Rome-Milan train, but to the regional trains which every morning our co-citizens take to go to work. These are the social and public priorities that the Minister of Economic Affairs should already have addressed.Asset - backed securitization: how to collect financial resources for the infrastructure of public utilities on securities markets.