On the Perils of Structured Loans Financing in France and Italy
| Author | Chiara Oldani |
| DOI | http://doi.org/10.1111/1758-5899.12686 |
| Date | 01 September 2019 |
| Published date | 01 September 2019 |
On the Perils of Structured Loans Financing in
France and Italy
Chiara Oldani
University of Viterbo “La Tuscia”
Abstract
The restructuring process of sovereign debt is not yet managed under common global rules; public debt stabilisation is an
explicit policy goal in the EU, but cannot be achieved if local public authorities do not control their liabilities and connected
risks. EU local administrations’debt soared due to the economic downturn, reduced resources transferred from the central
state and increasing expenses. After 2000, French and Italian local authorities extensively underwrote complex financial instru-
ments, such as over the counter (OTC) interest rate and exchange rate derivatives and structured loans (i.e. loans with embed-
ded derivatives) to manage their growing liabilities; the proliferation of derivatives among European public administrations
has been favoured by the absence of proper disclosure and of monitoring procedures. Losses due to structured loans accumu-
lated and in 2017 French local authorities asked for state rescue; similarly, some Italian regions and municipalities reported rel-
evant losses. The reduction of financial risks can be achieved by improving information and transparency, by reducing moral
hazard, and limiting ‘revolving doors’.
1. Local administrations’debt, hazard and risks
Public debt rose steadily after 2007, and over 10 years after
the global financial crisis, the restructuring process of sover-
eign debt is not yet managed under common global rules.
This policy oversight is the result of unbalanced power of
financial markets and operators, who prevailed over non-fi-
nancial customers. After 2000, French and Italian local authori-
ties extensively underwrote complex financial instruments,
such as over the counter (OTC) interest rate and exchange
rate derivatives and structured loans (i.e. loans with embed-
ded derivatives), to manage their liabilities under weak regu-
lation, small transparency and information on risks. Losses
accumulated and French local authorities asked for state res-
cue (Cour des comptes, 2017); similarly, some Italian regions
and municipalities reported relevant losses (i.e. Campania,
Piedmont and the City of Milan). This paper fills a gap in the
literature by describing the perils of complex financial con-
tracts and by considering the policy problems raised by their
extensive use by local administrations, in the aftermath of the
financial and sovereign debt crises.
Over the last decades the public debt for advanced
economies has kept increasing and in 2017 reached an aver-
age value of 103% with respect to GDP (IMF, 2018). Italy has
the second largest public debt relative to GDP in Europe, at
131% in 2017, and the French public debt reached 96%
over GDP (Figure 1); contrary to European budget rules, over
the 2007–2017 period, Italy and France increased their gross
public debts. After 2007 the Italian and French economies
exhibited poor growth, both countries suffered the negative
consequences of the financial crisis of 2007–2009, and also
experienced the sovereign debt crisis in 2011. These events
reduced the resources that the central state transferred to
local administrations, pushing further local authorities’debt
that added to that of the central state. The increase in
expenditures and unexpected losses, also related to swaps
and toxic loans, by local authorities have reduced the effec-
tiveness of spending cuts policies (i.e. austerity measures).
The restructuring process of sovereign debt is not yet
governed by a global system (Gallagher, 2012). The UN
(Guzman and Stiglitz, 2016) introduced nine principles as
the basis for a restructuring process, but they have not yet
been translated into the domestic rule of law of G7 or G20
countries. This policy oversight is the result of the unbal-
anced power of financial markets and operators, who pre-
vailed over non-financial customers (Bavoso, 2016).
The proliferation of derivatives among European public
administrations has been favoured by the institutional
design (Bavoso, 2016), regardless of its social implications
on welfare, and by the absence of proper disclosure and
monitoring procedures (Organisation for Economic Coopera-
tion and Development 2005, 2008, 2011). Member states
were not compelled to report on their debt related instru-
ments until 2009, based on Eurostat rules and accounting
principles, similar to other countries in the world at that
time (Oldani, 2008); public sector accounting rules were
unable to manage the probabilistic effects of these financial
contracts since they were not risk based, but the asymmet-
ric information related to the possibility to register off bal-
ance sheets, these contracts and their (undesired) effects
favoured their strategic use, as in the case of Greece (Euro-
pean Commission 2010). The Republic of Italy and of France
hedged their public debts since the 1990s with interest rate
and currency swaps (Piga, 2001); after 2001 local administra-
tions in both countries extensively underwrote derivatives
contracts, mimicking the central state.
Global Policy (2019) 10:3 doi: 10.1111/1758-5899.12686 ©2019 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 10 . Issue 3 . September 2019 391
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