Italy asset sale plan no fix for debt woes
06/27/2012| 07:38am US/Eastern
Prime Minister Mario Monti's recently announced plan to sell state assets is likely to be hampered by depressed markets and political opposition, and economists say it will make only a marginal contribution to cutting Italy's huge stock of debt.
As Italy's borrowing costs rise, Monti has come under mounting pressure to accompany his tough austerity measures with asset sales that can eat into a debt worth more than 120 percent of output, the second highest in the euro zone after Greece's.
In a keynote speech on May 31, Bank of Italy Governor Ignazio Visco lent his voice to the chorus, saying "the scope for reducing the public debt by selling assets in the public domain must be exploited to the full".
Monti finally unveiled a plan this month, but analysts say that having soft-pedaled on privatizations since taking office in November, his latest initiative looks half hearted.
The government seems to have been discouraged by the prospect of selling state companies or real estate into a buyers' market, with the head of the country's audit court warning against the risk of a "fire sale" of valuable assets.
"What they are proposing is really not going to make much difference to Italy's debt situation," said Giorgio Barba Navaretti, economics professor at Milan University.
Perhaps the most significant aspect of the plan was an omission - the government said it had no intention of selling stakes in its largest and most valuable assets, oil producer Eni, utility Enel or defense contractor Finmeccanica.
"The problem is that equity markets are terribly depressed so there really is a risk of undervaluing these assets," said Barba Navaretti.
However Tito Boeri, economics professor at the same Bocconi university where Monti was rector, said the prime minister should have pushed ahead regardless, to give a clear message to markets that have driven Italy's benchmark borrowing costs back up to a dangerously high 6 percent.
Selling the state's remaining stakes in the three companies, together with road builder Anas, could have brought in close to 100 billion euros, he said, which would not only have meant a significant cut in a debt of nearly 2 trillion euros, but also an annual saving of at least 6 billion euros in interest payments.
Instead, Monti said three much smaller entities owned by the Treasury would be sold for 10 billion euros to a state holding company, the Cassa di Depositi and Prestiti (CDP), which is largely owned by the Treasury itself with a 70 percent stake.
"This is moving things from the right pocket to the left pocket," said Nicola Rossi, an economist and president of the Istituto Bruno Leoni, a Milan-based free-market think tank.
Navaretti said it was "certainly not a real privatization", while Boeri called the operation "financial engineering" and "a "totally improper use of the CDP", which was originally set up to provide financing to town councils by using postal savings.
The companies are Sace, an insurer of Italian companies' activities abroad, Simest, a service provider to Italian companies operating abroad, and Fintecna, a holding company.
Because the CDP is considered outside the public administration under EU definitions, the operation will cut public debt by up to 10 billion euros - or 0.6 percent of output - while increasing the CDP's debt by the same amount.
Though the sum is modest and the operation has raised eyebrows from an accounting point of view, 0.6 percent of GDP may still prove handy as the risk increases that Italy will miss its debt reduction targets due to a severe recession, spooking already nervous markets.
The CDP is also at the heart of Monti's other debt-cutting plans.
It will run two funds with the aim of selling state-owned real estate, from barracks to farmland, and locally run public utilities, but the government gave no revenue targets or time frame.
"It's all rather vague and improvised, as though Monti wants to be seen to be doing something on asset sales but without much conviction," said Bocconi University's Boeri.
A third fund, run directly by the Treasury, aims to sell up to 4.5 billion euros of real estate, a drop in the ocean compared with estimates of huge potential revenue of around 400 billion euros. Again, no time frame was given.
Real estate sales have been cited as a quick route to debt reduction for Italy for at least 20 years but numerous schemes have brought scant results, while depressed market conditions will make the task even less rewarding than usual.
The attempts by former Treasury Minister Giulio Tremonti to use securitization schemes to sell homes, offices and other buildings owned largely by state pensions agencies ended in failure, with the vast majority of buildings returned to their original owners and revenue far below target.
In the last five years governments led by Silvio Berlusconi and Romano Prodi have managed to sell less than 3 billion euros of state property.
The president of Italy's audit court, Raffaele Squitieri, told parliament last week that Monti's plans were threatened by the depressed housing market, with purchases down 20 percent in the first quarter of this year, and warned against a "fire sale" which would undervalue important state assets.
Stefano Scalera, the head of the Treasury's state property agency, L'Agenzia del Demanio (AD), also said tight credit conditions and weak property prices made selling conditions extremely difficult, and the agency was now proposing more in the form of medium- and long-term concessions than sales.
Illustrating the difficulties, he said the AD was about to put up for sale a former barracks near the northern town of Bologna for the fourth time.
"It will be the umpteenth test of whether or not it's possible to sell in this period," Scalera said.
For the CDP fund to buy stakes in locally run utilities and eventually sell them on the market looks even less promising, Boeri said.
The sale of such utilities has always been resisted by the political parties which covet them as a power base and with Monti's popularity and political clout waning and elections due in less than a year, the impression is that the government is moving too late.
In a letter to Italy last summer as the country slid into the centre of the euro zone debt crisis, the European Central Bank set out precise policy prescriptions in return for buying Italian bonds on the market to lower surging borrowing costs.
Among the recommendations were "the full liberalization of local public services" through "large scale privatizations".
Monti's latest plan is probably not what the central bank had in mind.
(additional reporting by Luca Trogni, editing by Mike Peacock)
By Gavin Jones