Opinion of the European Central Bank of 6 December 2002 at the request of the Italian Ministry for the Economy and Finance on a draft provision on bond conversion under Law No 483/93 (CON/2002/30)
Date: 2002-12-06
Institutions: European Central Bank
Subjects: Italy, bond, national law, public borrowing, rescheduling of public debt

EN

OPINION OF THE EUROPEAN CENTRAL BANK

of 6 December 2002

at the request of the Italian Ministry for the Economy and Finance

on a draft provision on bond conversion under Law No 483/93

(CON/2002/30)

1.

On  3  December  2002,  the  European  Central  Bank  (ECB)  received  a  request  from  the  Italian

Ministry  for  the  Economy  and  Finance  for  an  opinion  on  a  draft  provision  entitled  “Bond

conversion  under  Law  No  483/93”  (hereinafter  “the  draft  provision”).  It  is  understood  that  this

provision will be inserted in the draft Budget Law, to be approved by the Italian Parliament by the

end of this year.

2. 

The ECB’s competence to deliver an opinion is based on Article 105(4) of the Treaty establishing

the  European  Community  and  the  third  indent  of  Article  2(1)  of  Council  Decision  98/415/EC  of

29 June 1998 on the consultation of the European Central Bank by national authorities regarding

draft  legislative  provisions1,  as  the  draft  provision  concerns  operations  having  an  impact  on  the

Banca d’Italia’s balance sheet. In accordance with the first sentence of Article 17.5 of the Rules of

Procedure  of  the  European  Central  Bank,  the  Governing  Council  of  the  ECB  has  adopted  this

opinion.

3. 

The draft provision concerns a financial transaction that, according to the letter sent by the Ministry

for  the  Economy  and  Finance,  will  result  in  more  transparent  reporting  of  the  Banca  d’Italia’s

balance sheet and of the liabilities of the Republic of Italy. More specifically, paragraph 1 of the

draft provision provides for the possibility that the government bonds referred to in Article 2(1) of

Law  No  483  of  26  November  1993  can  be  converted,  with  effect  from  30  December  2002,  into

other government bonds with an amount of equal market value, subject to terms first being agreed

between the Ministry for the Economy and Finance and the Banca d'Italia. Law No 483/93, in order

to meet the requirements of the Treaty, prohibited any kind of credit facility by the Banca d’Italia

to the Treasury, and introduced a rule  according  to  which the  debt  account  held  by  the Treasury

with the Banca d’Italia had to be converted into government bonds, with an annual 1% interest rate

coupon, to be assigned to the Banca d’Italia. This rule was implemented by the Treasury Decree of

15 November 1994, which provided for an issue of Treasury bonds to be specifically assigned to

1 

OJ L 189, 3.7.1998, p. 42.

                                                     
the Banca d’Italia, in relation to the compulsory conversion of the debt account with the Treasury.

The draft provision provides the possibility of converting the above-mentioned government bonds

into  other  government  bonds  with  an  amount  of  equal  market  value.  Such  an  operation  will  be

effected for the purposes of Article 8(29), of Law No 887 of 22 December 1984, which allows the

Treasury Minister to restructure the public debt, through operations bound, inter alia, to change the

maturity of or to replace bonds. The terms and conditions of such a transaction will be regulated by

an ad hoc agreement.

4. 

According  to  the  second  paragraph  of  the  draft  provision,  as  from  the  tax  period  current  at

31 December 2002, the loss resulting from the decrease in value of assets deriving from the above-

mentioned  conversion  shall  be  fully  deductible  in  annual  instalments  of  amounts  not  exceeding

one-tenth of its total amount. Moreover, the third paragraph allows the Banca d’Italia to cover the

said loss  of  value  by  using,  on a  tax-free  basis,  the  funds  deriving  from  the  increase  in  value  of

gold,  as  regards  the  amounts  ascertained  at  1  January  1999  and  still  existing  at  the  time  of  the

conversion. The cost of gold accepted for tax purposes is equal to the value entered in the balance

sheet,  net  of  the  pertinent  revaluation  account  remaining  after the conversion.  Finally,  the  fourth

paragraph repeals Article 104(1)(b) of the Consolidated Version of the Income Tax Law approved

by Decree No 917 of the President of the Republic of 22 December 1986, which concerns the fiscal

treatment applicable to the Banca d’Italia’s capital gains on gold.

5. 

The  ECB  notes  that  the  draft  provision  provides  that  the  government  bonds  referred  to  in

Article 2(1) of Law No 483 of 26 November 1993 can be converted into other government bonds

with an amount of equal market value subject to the terms first being agreed between the Ministry

for the Economy and Finance and the Banca d'Italia. In order to be consistent with Article 108 of

the Treaty, any such conversion requires the consent of the Banca d’Italia.

6. 

Article 101 of the Treaty prohibits monetary financing of Member States by national central banks

(NCBs),  including  the  direct  purchase  from  Member  States  by  NCBs  of  debt  instruments.

Regarding Article 101, the ECB has considered the conversion  of  the  essentially  non-marketable

old government bonds currently reflected on the Banca d’Italia’s balance sheet into new marketable

government bonds with an amount required to be of equal market value.

7. 

Article 1(2) of Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions

for the application of the prohibitions referred to in Articles 104 and 104b(1) of the Treaty2 permits

the direct purchase from a Member State by an NCB of securities acquired from the Member State

to ensure the conversion into negotiable fixed-maturity securities under market conditions of fixed-

maturity  claims  acquired  before  1  January  1994  which  are  not  negotiable  or  not  under  market

conditions,  provided  that  the  maturity  of  the  securities  is  not  subsequent  to  that  of  the  afore-

mentioned claims. As noted in the third recital of Regulation (EC) No 3603/93, it is desirable that

NCBs should have on their balance sheets claims negotiable under market conditions, in particular

2

OJ L 332, 31.12.1993, p. 1.

2

                                                     
to give the required flexibility to the monetary policy of  the  European  System  of  Central  Banks.

Assuming that the maturity (i.e., the duration) of the new securities is not longer than that of the old

government bonds, the proposed bond conversion would not contradict the said Regulation.

8. 

From  the  point  of  view  of  financial  reporting,  the  ECB  is  of  the  view  that  the  proposed  bond

conversion  would  be  beneficial,  since  it  would  transform  non-marketable  claims  into  marketable

claims which would contribute to the transparency of the financial statement of the Eurosystem.

9. 

However, the ECB notes with concern the context of the government debt conversion at this point

in time. It notes that the conversion would result in a significant decline of government debt at a

time  when  public  debt  in  Italy  is  otherwise  rising,  partly  due  to  insufficient  structural  fiscal

consolidation.  Therefore,  what  should  be  the  primary  objective  of  the  conversion,  i.e.,  the

redemption  of  non-marketable  debt,  could  be  perceived  as  being  secondary  to  the  objective  of  a

one-off reduction of government debt.

10.  The ECB is of the view that it must be carefully assessed whether the debt reduction in conjunction

with expected fiscal developments is consistent with the aims  of  Article  104(2)(b)  of the Treaty,

which requires the debt ratio to be “…sufficiently diminishing and approaching the reference value

at a satisfactory pace”.

11. 

In line with the Code of best practices on the compilation and reporting of budgetary statistics by

Member States as published by the European Commission, the ECB notes that there should be an

examination of the impact of this operation on the government deficit.

12.  The  ECB  would  like  to  emphasise  that  this  opinion  may  be  subject  to  further  review  and

consideration in light of the agreement to be concluded between the Ministry for the Economy and

Finance and the Banca d’Italia.

13.  This opinion will be published on the ECB’s website.

Done at Frankfurt am Main on 6 December 2002.

The President of the ECB

[signed]

 Willem F. DUISENBERG

3