REPORT TO PARLIAMENT ON THE ADMINISTRATION OF THE "GOVERNMENT BOND SINKING FUND"

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1 REPORT TO PARLIAMENT ON THE ADMINISTRATION OF THE "GOVERNMENT BOND SINKING FUND" Introduction This Report is drawn up as per article 44, paragraph 3 of the President of the Republic's Decree no. 398, 30 December Consolidated Act of legislative and regulatory dispositions on public debt (hereinafter public debt CA ). It illustrates the purchase dynamics that determine the yearly balance of the Government bond sinking Fund (hereinafter Fund ), as well as the management of the resources in pursuing the prescribed aims. The Fund's administrative management was greatly modified following the ECB's Governing Council Decision of 5 June 2014 (ECB/2014/23). This, together with guidelines ECB/2014/9 and 22, introduced significant changes concerning: national central banks' management operations of assets and liabilities; the remuneration of Government deposits; and the observance of the Treaty on the functioning of the European Union's prohibition of monetary financing. The amendment was introduced by article 1, paragraph 387 of Stability Law no. 190, 23 December This established that the Fund's account, established and held at the Bank of Italy, be transferred with its deposits outside the State Treasury to Cassa Depositi e Prestiti S.p.A. (CDP). Therefore, the overall amount of deposits in the Fund, with value date 2 January 2015, was transferred to the management account in the name of CDP held at the same Bank of Italy. A special agreement, contracted between the Treasury Department and CDP on 30 December 2014, and approved by the Director General of the Treasury's decree no. 3513, 19 January 2015, regulates how the Fund is to be managed, both in terms of the transfers to the above mentioned account, and as regards debt reduction operations (refunds or buybacks). The management of sums credited and utilized is assigned by article 48 of the public debt CA to the director general of the Treasury, or by proxy, to the director general of public debt. Income to the Fund, as per article 45 paragraph 2 of the public debt CA, arrives through the following budget items of heading X: 4055 (asset divestment and sale of State stock); 3330 (donations, proceeds from fees for granting State guarantees to banks and, if present, allotments from the Ministry of Economy and Finance [MEF]); 3512 (resources deriving from the application of the remuneration cap on wages or compensation for employee or freelance working relationships with the public administration); and 4859 (repayment of the principal of sums advanced by the State to local authorities). Otherwise, sums may be allocated directly to expense item 9565 connected to the Fund, in those cases expressly provided for by law (see the following paragraph). The amounts that transit in budget are initially transferred to the account managed by CDP by means of decrees of variation from income to expenditure. They are subject to the recording of the Court of Accounts and transit subsequently via electronic payment orders to expense item 9565, pertaining to the MEF's responsible department - the Treasury - (Voting Unit Government bond Amortization). The divestment of stock held directly by the MEF, as well as connected operations, is the Fund s primary source of income. The aim of reducing outstanding public debt is pursued both by market buybacks of circulating securities and by redemptions at maturity. 1

2 Income and transfers to the sinking Fund Overall, during 2015, ,44 euros entered the two income items, of which ,30 euros regarded privatisations or similar operations. In detail: proceeds regarding the fees for granting the State's guarantee on the liabilities of Italian banks during the financial crisis entered item 3330, as per article 8 paragraph 19 of decree law no. 201, 6 December 2011 (passed by law no. 14, 22 December 2011). The overall amount of fees paid by banks that entered the budget item during 2015 was ,29 euros ,79 euros were transferred to the account during 2015, while ,50 euros, which arrived in the final months of the year, were transferred during the first months of 2016; 5.132,36 euros of donations by private citizens entered item 3330 during the year, as contributions to extinguish public debt, both through payments to the postal account in the Fund's name, and through bank transfers to the IBAN in the Fund's name connected with the same budget item; 1.471,50 euros entered item 3330 between February and July These pertained to the repayment of 10% of sums deriving from the transfer of real-estate assets which belonged to local authorities, enacting article 56 bis, paragraph 11, of decree law no. 69, 21 June 2013 (the so-called public property federalism); ,00 euros entered item 4055 during March 2015, the counter-value of the market sale of ENEL S.p.A. shares. The amount was transferred to the account in May a payment of ,00 euros to item 4055 was made in June This was the counter-value of the repayment of the principal of financial instruments issued as per article 23 and following of decree law no. 95, 6 July 2012 (the so-called Monti-Bonds), following Monte dei Paschi di Siena bank's exercising its right of redemption. The amount was transferred to the account in October a payment of ,00 euros to item 4055 was made in September 2015, concerning ENAV's share capital reduction. The amount was transferred to the account in December payments totalling ,41 euros entered item 4055 from the sale of ordinary CDP S.p.A. shares to minority stakeholding Banking Establishments, enacting article 36, paragraph 3-octies of decree law no. 179, 18 October The amount was transferred to the account in December payments totalling ,10 euros entered item 4055 from the divestment of State-owned agricultural land and land allocated for agriculture, as per article 66 of decree law no. 1, 24 January Of said amount, ,37 euros were transferred to the account by December 2

3 payments for 1.811,86 euros entered item 4055 for reallocations by the authority Equitalia S.p.A, while ,90 euros were paid to the item for accounting adjustments by the Revenue Office; payments totalling ,89 euros entered item Of the same: ,00 euros were for the counter-value of the IPO for Poste Italiane S.p.A. shares; ,87 euros for the sale of other Poste Italiane S.p.A. shares arising from the partial implementation of the so-called GreenShoe option; and ,02 euros from the price stabilization of the same shares. The amount was transferred in March 2016; payments totalling ,87 euros were made to item 3512 for resources deriving from the application of the remuneration cap on wages or compensation for employee or freelance working relationships with the public administration, as per article 23 ter of decree law no. 201, 6 December Of this amount, ,45 euros were transferred by December finally, payments totalling ,25 euros were made to item 4859, for the principal of sums advanced by the State to local authorities to pay debts, as per articles 1, 2 and 3 of decree law no. 35, 8 April 2013 (Urgent dispositions to pay the public administration's overdue debt and to rebalance local authorities' finances), and article 45 of decree law no. 66, 24 April 2014 (Urgent measures for competitiveness and social justice Restructuring Regional debt). Of the same amount, ,54 euros were transferred during 2015, and the remaining ,71 euros during the first months of The amounts described above that have not yet been transferred to the account were however reassigned, through budget amendment decrees, in January 2016, to expenditure item 9565 in the 2015 residuals account In summary, during 2015 and for the same financial year, a total of ,97 euros were transferred to the Fund's account. Of the same: ,41 euros to item 4055 for proceeds from privatisations or similar operations described above, with the remaining ,56 euros primarily for the reimbursement of principal of sums advanced by the State ( ,54 euros); for resources deriving from the application of the remuneration cap on wages or compensation for employee or freelance working relationships with the public administration ( ,45 euros); for fees for granting State guarantees on bank liabilities ( ,79 euros); as well as for different returns ( ,78 euros). During 2015, apart from the above mentioned transfers, sums collected on the budget items during the 2014 financial year (see the 2014 Report to Parliament), totalling ,47 euros were processed, to be subsequently credited to the Fund's account,. These were from a variety of revenues, mostly concerning fees from State guarantees to banks ( ,67 euros), principal paid by local authorities ( ,95 euros), with the rest pertaining to less significant earnings ( ,85 euros). Finally, a sum totalling ,00 euros was directly allocated to budget expense item 9565, and subsequently transferred to the Fund ,00 euros of the same as per articles 17 and 12 paragraph 4 of decree law no. 149, 28 December 2013, passed with amendments by decree law no. 13, 21 February 2014, concerned the reallocation of 2 per mil of funds not paid to political parties; and ,00 euros as per article 23 ter of law no. 201, 6 December 2011 (Resources arising from the remuneration cap), as detailed in Table A. 3

4 A grand total of ,00 euros was thus transferred to the Fund's account during 2015, inclusive of the above mentioned transfers related to sums collected in the budget during the 2014 financial period. Interest Like every year, interest accrued on the account's balance is directly credited to the same account, as per article 46 paragraph 3 of the public debt CA. The Agreement with CDP entered into force on 2 January The same day the Fund with its balance was transferred outside the state Treasury. Remuneration on the balance is calculated every solar semester, applying the 1-month Euribor according to the actual/360 method every day. The rate to be applied has never been less than zero, as established by article 2 paragraph 1 of the Agreement (see the paragraph on interest in the 2014 Report to Parliament). As for the year 2015, the interest credited was that accrued between 7 June 2014 and 1 January 2015 paid by the Bank of Italy as established by ECB guidelines mentioned in the Introduction and detailed in the 2014 Report to Parliament and those accrued between 2 January 2015 and 30 June 2015, as per the Agreement contracted with CDP. The second semester of 2015 is paid in January of the following year. The amounts as presented in the annexed tables (in particular Table C), mainly reflect the account's different remuneration regime arising from the new norms mentioned above and by the changed market conditions. Inflows to the Fund's budget items 3330, 4055, 3512, and 4859 are detailed in the annexes (Table A Account balances up to Summary of inflows from 2013 to 2015). Market purchases Market buybacks were not considered convenient since nearly all bonds had above par prices and thus would not have optimized the debt reduction effect. Redemption at maturity The balance on the Fund's account can be used not only to buy back securities on the market, but also to redeem securities reaching maturity, as per article 48, paragraph 1, letter b), of the President of the Republic's Decree no. 398, 30 December This option presents particular advantages if the durations of the securities on the secondary market are too long, or when overloading recourse to the market is to be avoided, since the same becomes less liquid and there is a risk of incurring higher auction costs. That said, euros were used as a partial redemption of the BTP 1 November 2010/2015 bearing ISIN IT Therefore, the Fund's overall nominal usage was of euros (as highlighted in Tables D and E). For a complete presentation of the Fund s account's activity, see the tables on inflows and activity, which illustrate, for the entire period, the amounts transferred and their utilizations, 4

5 including interest deposited every year (Table B - Activity on the Fund's account up to and Table C - Interest credited to the Fund's account per year up to ). The Fund's balance on 31 December 2015, corresponding to the availability recorded in the account managed by Cassa Depositi e Prestiti was equal to ,09 euros. Annexes: Table A - Government bond sinking fund - Details of budget income from 2013 to 20015; Table B - Activity on the Fund's account - Income and utilizations from 2003 to Table C - Summary of interest credited to the Fund's account per year from 2003 to Table D - Description of the Fund's financial situation in Table E - Summary of debt relief operations with the Sinking Fund from 1995 to THE MINISTER OF ECONOMY AND FINANCE (Pier Carlo Padoan) 5