Proposal for a COUNCIL DECISION concerning a Community loan in favour of the Italian Republic
Date: 1993-01-15
Institutions: European Commission
Subjects: Community loan, Italy, balance of payments, currency adjustment, medium-term credit, reflation

COMMISSION OF THE EUROPEAN  COMMUNITIES 

COM(93) 17  final 

Brussels, 15 January 1993 

Proposal  for a 

COUNCIL DECISION 

Concerning a Community  loan in favour of the itaiian 
Repub11c 

(presented by the Commission) 

-  1 -

EXPLANATORY  MEMORANDUM 

Application  by  the  Italian Government  for 
a Community  balance-of-payments  loan 

1.  The  Italian  Government  (through  a  letter  from  Mr  Barucci,  the 
Treasury  Minister,  to  President  Delors  on  2 October,  1992)  has 
applied  for  a  Community  loan  of  ECU  8 000 million  according  to 
Council  Regulation  (EEC) N*  1969/88  of  24  June  1988  establishing  a 
single  facility  providing  medium-term  financial  assistance  for 
Member  States' balances  of  payments. 

2.  During  the  period  of  currency  turbulence  which  preceded  the 
realignment  of  the Lira  within  the exchange  rate  mechanism  (ERM) of 
the  European  Monetary  System  and,  then,  the  suspension  of  Lira 
participation  in  the  ERM,  there  were  very  substantial  capital 
outflows  from  Italy,  a major  reduction  in official  reserves  and  an 
increase  in  official  short-term  indebtedness.  Since  September  a 
reflow  of  capital 
into  Italy  has  allowed  only  a  partial 
reconstitution of  the  lost  reserves. 

3.  The  application  for  a  Community  balance-of-payments  loan  is  an 
element  in the  Italian  Government's  strategy  to  restore  credibility 
to  its policies  and  stability  to  financial  markets,  thus  helping  to 
rebuild  lost  official  reserves,  prepare  for  re-entry  of  the  Lira 
into  the  ERM  and  achieve  more  normal  levels  of  interest  rates.  The 
key  to  credibility  will  be  successful  pursuit  of  budgetary 
adjustment.  After  many  years  during  which  the  budget  deficit  has 
remained  above  10%  of  GDP  and  the  public  debt  ratio  has  been 
steadily  rising  (to  over  100% of  GDP), the  Italian  Government  has 
introduced  a  large  budgetary  adjustment  package  for  1993.  This  is 
the  first  stage  in  the  Italian  Government's  medium-term  adjustment 
programme  for  1993-95,  in  which  it  is  planned  to  halve  the  total 
budget  deficit  and  to  stabilize  the  debt  ratio  by  1995.  An 
important  feature  of  the  1993 budget  is that  it  starts  to  tackle  in 
a  durable  fashion  some  of  the  underlying  structural  weaknesses  of 
the  Italian  public  finances. 

4.  The  Commission  proposes  that  the  conditions  attached  to  the 
Community  balance-of-payments  loan  should  be  designed  to  reinforce 
the  external  disciplines  (already  coming  from  market  pressures)  on 
the  Italian  Government  to  pursue  its  planned  budgetary  adjustment 
in  1993  and  subsequent  years. To  this  end  the  granting  of  the  loan 
in  a  series  of  tranches  is proposed,  closely  linked  to  the  Italian 
budgetary  timetable  and  dependent  at  each  stage  on  the  introduction 
of  adequate  budgetary  adjustment  measures. 

5.  The  Italian  application  was  discussed  by  the  Monetary  Committee  on 
14 January  1993;  the  Committee  positively  assessed  the  Italian 
adjustment  programme,  stressed  the  need  for  budgetary  targets  to be 
respected,  and  generally  supported  the  approach  to  the  loan 
application  proposed  by  the  Commission. 

6.  In  view  of  the  above,  the  Commission  proposes  to  the  Council  to 
adopt  the  attached  Decision  granting  a  loan of  ECU  8  000 million  to 
the  Italian  Republic. 

-  1a -

Proposal  for a 

COUNT-M  DECISION 

[of 

1993] 

Concerning  a Community  loan  in favour  of  the  Italian 
Republie 

(93/.../EEC) 

THE COUNCIL OF THE  EUROPEAN  COMMUNITIES, 

Having  regard  to the Treaty  establishing  the European  Economic  Community, 

Having  regard  to  Council  Regulation  (EEC) N"  1969/88  of  24 June  1988 
establishing  a  single  facility  providing  medium-term  financial  assistance 
for  Member  States'  balances  of  payments^1),  and  in  particular  Article 1 
thereof, 

Having  regard  to  the  proposal  from 
consultation of  the Monetary  Committee, 

the  Commission,  submitted  after 

Whereas  the  Italian  Republic  has  appSied  for  medium-term  financial 
assistance  to support  its balance  of  payments  and  its economic  programme  of 
adjustment  and  reform-, 

Whereas  the  total 
Member 
(EEC) N-  1969/88; 

States 

amount  outstanding  under  previous  loans 
is 

specified 

ceiling 

within 

the 

granted  to  the 
Regulation 
in 

Whereas  in  addition  to  the  immediate  problems  in  the  balance  of  payments 
arising  from  the  substantial  capital  outflows  which  occurred  during  the 
recent  period  of  currency  turbulence,  the  consequent  reduction  in  official 
reserves  and  increase  in  short-term  indebtedness,  the  Italian  economy 
exhibits  serious  structural  imbalances,  in particular  in  the  public  finance 
domain, affecting  the  stability  of  its external  position; whereas  a  balance 
of  parents  loan  disbursed  in  tranches  is  Justified  while  measures  of 
consolidation  and  adjustment  are  undertaken;  whereas  tiio  proceeds  of  the 
ioan will  be used  to strengthen  the  Italian official  reserves; 

(1)  OJ  N*  L  178, 8.7.1988, p. 1 

- 2 -

Whereas  it  is  the  intention  of  the  Italian  Government  to  re-enter  the 
exchange  rate  mechanism  (ERM)  of  the  European  Monetary  System;  whereas 
making  such  an  ERM  re-entry  sustainable  requires  the  implementation  of  a 
programme which will  achieve  further  progress  in reducing  inflation  and an 
improvement  in the structure of the public finances; whereas such objectives 
of  improved  convergence  with  the  best-performing  Community  economies will 
only be met by a substantial  reduction  in public sector  deficits  leading to 
a  declining  trend  in  the  public  debt/GDP  ratio,  by  reforms  of  the 
organisation of  the public sector, by a tight monetary  policy and by a firm 
exchange rate poi icy; 

Whereas  the  Itaiian  Government  is  pursuing  a  three-year  programme  of 
budgetary  adjustment  aimed  at  substantially  reducing  deficits  so  that  the 
public debt  rati©  is first stabilized and then put on a downward  trend, and 
has presented  this programme on which  its application  for  a  loan  is based; 
whereas  the  Itaiian  Government  will  implement  fully  its  programme  of 
budgetary  adjustment  and  reform over  a three-year  period  from  1993 to 1995 
so as to achieve  the targets and  introduce  the specific measures  indicated 
in its programme agreed as follows: 

1. The budgetary targets for 1993, 1994 and 1995 are set  in order  to achieve 
the  stabilization of  the public  debt  ratio  by  1995. On  the  basis of a 
projected GDP growth of 1.5%  in 1993, 2.4% in 1994 and 2.6%  in 1995 they 
are: 

-  for 1993, LIT 150 trillion for the state sector borrowing requirement, 
with  a  surplus  for  the  state  sector  borrowing  requirement  net  of 
interest payments (the primary surplus) of LIT 50 trillion; 

-  for 1994, LIT 125 trillion for the state sector borrowing requirement, 

with a primary surplus of LIT 77 trillion; 

-  for  1995, LIT 85 trillion for  the state sector  borrowing  requirement, 

with a primary surplus of LIT 115 trillion. 

2.  If the burden of  interest payments  in 1994 and 1995  is foreseen to exceed 
that projected at present by the  Italian authorities (LIT 202 trillion in 
1994 and  LIT 200 trillion  in 1995),  the targets  for  the primary  surplus 
will  be  revised upwards by  the time detailed  budget  proposals  for these 
years  are  announced,  in order  to ensure  respect  of  the  targets  for  the 
total  borrowing  requirement  and  to stabilize  the  gross  public  debt/GDP 
ratio  by  199.5. Thereafter  the  primary  surplus  will  be  maintained  at  a 
sufficiently high  level to ensure further reductions  in the total deficit 
and a downward trend  in the debt ratio. 

3. The deficit  targets are set  in absolute amounts as stated  above; on the 
basis  of  the  latest  macro-economic  projections  made  by  the  Italian 
authorities they represent: 

-  for  the state sector borrowing requirement, 9,3% of GDP  in 1993, 7,3% 

in 1994 and 4,7% in 1995; 

-  for the primary surplus, 3,1% of GDP  in 1993, 4,5%  in 1994 and 6,4% in 

1995; 

-  3 -

The  corresponding  development  of  the  state  sector  gross  debt/GDP  ratio  is 
110.6% at  end  1993,  112.5% at  end  1994 and  112.4% at  end  1995. 

4. The  programme  of  privatization  of  state-owned  assets  to be  pursued  by  the 
Italian  authorities  is  intended  to  provide  net  proceeds  to  the  state 
sector  accounts  of  LIT  7  trillion  in  1993,  LIT  15  trillion  in  1994  and 
LIT  12  trillion  in  1995.  Within  the  framework  of  legislation  already 
passed,  the  Italian  Government  will  publish  a  list  of  public  sector 
enterprises  and  other  state-owned  assets  to  be  privatized  together  with 
an  indicative  timetable  for  these  sales.  Any  state  sector  privatization 
receipts  in  excess  of  those  currently  planned  will  be  used  to  increase 
the  state  sector  primary  surplus  and  hence  to  reduce  the  debt  ratio,  and 
will  not  be  used  to  substitute  for  other  necessary  adjustments  of 
expenditure  and  revenue. 

5. Within  the  framework  of  the  enabling  legislation  already  enacted,  the 
Italian  Government  will  continue  implementation  of  detailed  measures  of 
structural  reform  in  the  areas  of  (i) health  care,  with  the  aim  of 
reducing  inefficiencies  and  containing  expenditure,  also  by  rendering  the 
regional  level  of  government  fully  responsible  for  expenditure  overruns 
incurred  in  the  operations  of  the  decentralized  National  Health  Service; 
(ii) civil  service,  in  order  to  improve  the  control  on  expenditure  for 
compensation  of  employees  and  the  efficiency  and  productivity  of  public 
administration,  also  by  having  recourse  to extended  mobility  of  personnel 
and  increasing  managerial  responsibility;  (iii) pensions,  with  the 
objective  of  stabilizing  pension  expenditure  relative  to  GDP,  also  by 
raising  the  retirement  age,  harmonizing  pension  schemes  and  limiting 
indexation  to  the  protection  of  purchasing  power;  and  (iv)  local  finance, 
in  order  to  decrease  the  dependence  of  local  authorities  on  transfers 
from  the  central  government,  also  by  introducing  new  forms  of  local 
taxation. 

Whereas  it  is also  the  intention  of  the  Italian  authorities  to  continue  the 
pursuit  of  policies  in  the  monetary  sphere  and  in  the  field  of  incomes 
conducive  to  reducing  the  rate of  inflation,  in particular: 

-  Geared  to  the  primary  objective  of  containing  inflationary  pressures,  the 
growth  of  M2  in  1993  will  be  in  the  range  of  5-7%,  which  is  consistent 
with  the  1993  projections  for  nominal  GDP  growth.  In  conjunction  with 
this  objective,  the  Banca  d'Italia  will  closely  monitor  the  growth  rate 
of  domestic  credit  consistent  with  the  objectives  for  the  rate  of 
inflation  and  expansion  of  M2.  In  1994  and  1995,  monetary  targets  and 
out-turns  should  continue  to  be  in  line  with  the  decline  in  inflation 
projected  in  the  Italian  Government's  budgetary  adjustment  three-year 
programme.  It  is  the  intention  of  the  Italian  Government  to  introduce 
legislation  designed  to  abolish  the  legal  possibility  of  monetary 
financing  by  the  end  of  1993,  anticipating  the  objective  of  Article  104 
of  the Treaty  on  European  Union. 

4  -

-  The  Italian  Government  will  seek  to secure  wage  moderation  throughout  the 
economy  by  building  on  the  July  1992  agreement  between  the  Government, 
the  trade  unions  and  the  industrial  employers'  association  on  the  reform 
of  the  wage-setting  mechanism  and  by  maintaining  the  planned  wage 
restraint  in the  public  sector. 

Whereas  it  is agreed  that  in the  implementation  of  this  Decision  the  Italian 
authorities will  consult  closely  with  the  Commission  and  will  make  available 
all  the  necessary  information  for  a  full  and  effective  monitoring  of  the 
agreed  programme  of  adjustment;  whereas,  In  accordance  with  this  Decision, 
developments  in  the  Italian  economy  and  in  Italian  economic  policy  will  be 
reviewed  twice  a  year  in  the  framework  of  multilateral  surveillance  or  more 
frequently  if  warranted, 

HAS ADOPTED  THIS  DECISION: 

Article 1 

Regulation 
The  Community 
(EEC) No.  1969/88  a  loan  of  ECU  8  000 million  or  the  equivalent  amount  in 
other  currencies. 

Republic 

Italian 

under 

shall 

grant 

the 

Article  2 

The  loan  shall  be  made  available  to  the  Italian  Republic  in  four 
instalments. The  average  life of  each  instalment  shall  not  exceed  six  years. 
The  first  two  instalments  shall  be made  as  follows  : 

-  the  first  instalment  amounting  to  ECU  2 000 million  or  the  equivalent 

in other  currencies  not  earlier  than  1 February  1993; 

-  the  second  instalment  amounting  to  ECU  2 000 million  or  the  equivalent 
amount 
than 
in  other  currencies  to  be  released  not  earlier 
1  July  1993,  and  in  any  case  after  the  Commission,  in  consultation 
with  the  Council  and  in  the  light  of  an  examination  made  in 
collaboration  with  the  Monetary  Committee  of  the  progress  in  the 
execution  of  the  programme,  is satisfied  that  any  additional  measures 
which  may, Jbe necessary  have  already  been  taken  and  that  the  budgetary 
targets  of  the  programme  for  1993,  after  taking  into  account  weaker 
economic  growth  or  higher  interest  rates  than  projected,  are  likely  to 
be  achieved. 

The  third  and  fourth  instalments  shall  be made  as  follows  : 

-  Before  30 September  1993,  the  Italian  Government,  in  collaboration 
with  the  Commission,  will  reassess  the  budgetary  targets  for  1994  so 
as  to  achieve  the  key  objectives  of  the  medium-term  programme  and  in 
the  light  of  actual  and  prospective  macroeeonomic  developments.  The 
third  instalment  amounting  to  ECU  2 000 million  or  the  equivalent 
amount  in  other  currencies  will  be  released  not  earlier  than 
1  February  1994  and  in  any  case  only  after  the  Commission,  in 

-  5 -

consultation  with  the  Council  and  in  the  light  of  an  examination  made 
in  collaboration  with  the  Monetary  Committee,  is  satisfied  that  the 
measures  necessary  to  achieve  the  budgetary  targets  set  for  1994  have 
been  implemented. 

Before  30 September  1994,  the  Itaiian  Government,  in  collaboration 
with  the  Commission,  will  reassess  the  budgetary  targets  for  1995  so 
as  to  achieve  the  key  objectives  of  the  medium-term  programme  and  in 
the  light  of  actual  and  prospective  macroeconomic  developments.  The 
fourth  Instalment  amounting  to  ECU  2 000 million  or  the  equivalent 
amount 
in  other  currencies  will  be  released  not  earlier  than 
1  February  1995  and  in  any  case  only  after  the  Commission,  in 
consultation  with  the  Council  and  in  the  light  of  an  examination  made 
in  collaboration  with  the  Monetary  Committee,  is  satisfied  that  the 
measures  necessary  to  achieve  the  budgetary  targets  set  for  1995  have 
been  implemented. 

Article  3 

1. The  loan  shall  be  granted  on  the  basis  of  the  decision  taken  by  the 
itaiian  Republic  to  implement  the  budgetary  adjustment  and  reform 
programme  which  it  has  presented,  the  objectives  of  which  are  set  out  in 
the  recitals  to  this  Decision. 

2. The  Commission,  in  collaboration  with  the  Monetary  Committee,  shall 
examine  at  regular  intervals  the  evolution  of  the  economic  situation  of 
Italy  and  the execution of  the budgetary  adjustment  and  reform  programme, 
as  implemented.  These  examinations  will  continue  until  the  loan  is  fully 
repaid. 

This  Decision  is addressed  to  the  Italian  Republic. 

Article  4 

Done  at  Brussels, 

For  the CounciI 
The  President 

ISSN 0254-1475 

COM (93) 17 final 

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