automation of trading and settlement facilities, no attempt is made to evaluate the extent to which Italian and Greek practice complies with the public debt management guidelines.

Following this introduction, the remainder of the first chapter presents the main findings and policy lessons for developing countries. The other two chapters cover respectively the experience of Italy and Greece. In addition to short introductory and concluding sections, each chapter addresses three successive periods—the period of massive debt accumulation, the search for investor diversity and market finance, and the search for efficiency and international integration. The periods differ between the two countries reflecting differences in the timing of their problems and policy responses.

# **1.2 Main Findings**

There are many similarities as well as differences in the experiences of Italy and Greece. The main similarities include the following:

- Both countries were more successful in managing the rise in public debt than in curbing it.<sup>1</sup> Italy experienced an increase of its general government debt from 67 percent of GDP in 1980 to 98 percent in 1990 and 124 percent in 1995. In Greece, general government debt rose from 38 percent of GDP in 1980 to 79 percent in 1990 and 110 percent in 1995.<sup>2</sup>

- Both countries implemented a “divorce” between the public treasury and the central bank, aiming to prevent the monetary financing of the public sector, as part of the obligations imposed by the Maastricht Treaty. In Italy a half-hearted attempt was effected as early as 1981 but it was fully formalized in 1993 when Bank of Italy advances to the Italian treasury were banned. A similar provision was also implemented in Greece in 1993.

- A third similarity was the success in placing a large proportion of debt with the household sector, thus avoiding excessive reliance on banks and monetization of the debt. This was facilitated by the large supply of household financial savings in both countries and by the limited availability of alternative investments, which was partly caused by the imposition of strict controls on holding foreign assets and partly by the absence of local institutional investors. Preferential tax treatment of investment income from government securities also played an important part.

- Another common feature was the use of variable-cost short-to-medium-term instruments. Some instruments were denominated in local currency and bore variable interest rates linked to short-term rates. Other instruments carried fixed nominal coupons but were indexed to the ECU and other foreign currencies.

- Both countries made little use of price-indexed instruments. Financial indexation was preferred because it enjoyed greater credibility than price indexation and because it implied a lower long-term cost. The lack of public trust in official price indices and the fear of official manipulation of the indexation mechanism also probably

> 1 The point was made by Conti and Hamaui (1994) for the case of Italy but it also applies to Greece.

> 2 In the case of Greece, shortcomings in recording and reporting public debt data concealed a much higher level of public debt that may have been closer to 150 percent of GDP at its peak.

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