Why the Italian government should consider a (perpetual) Sukuk issuance
According to ISTAT (the National Statistic Institution)’s recent press release, in the fourth quarter of 2018, Italian GDP decreased by 0.2% with respect to the previous quarter. It was the second quarterly contraction in a row. The carry-over annual GDP growth for 2019 is equal to 0.2%. This means that after nearly four years of steady, if slow, growth, Italy’s economy has fallen again into recession.
These very bad news for the country per se are even worse if put into the context of the fiscal policy measures taken by the Italian government to implement considerable spending plans in particular with the lowering of the pension age, and the implementation of the socalled ‘citizenship income’ (reddito di cittadinanza). In fact, the introduction of those measures triggers an increase of the budget deficit which has been heavily negotiated and eventually agreed with the EU Commission considering the government’s forecast of a GDP growth in 2019 in the region of 1-1.5%.
To face this situation, the government is planning to find financial resources through the sale of part of the public real estate portfolio, but it is reasonable to maintain that such a process could occur only within a medium to longterm time frame, after proper action to maximize the value of the assets has been taken, while the current fiscal policy needs to be funded immediately.
In this context, consideration should be given to instruments that may immediately support the government’s spending plans as well as additional investments to boost the economy without increasing the national public debt which is in the region of 130% of GDP. In particular, the idea of an Italian sovereign Sukuk issuance could be reconsidered in the form of a perpetual instrument.
As we know, perpetual Sukuk have distinctive features compared to common Sukuk as the instrument carries no maturity date and is typically treated, as in the case of perpetual bonds, as equity (from an accounting standpoint) rather than debt, as it features ‘perpetuity’ and ‘subordination’.
In fact, perpetual Sukuk rank senior only to the issuer’s ordinary shares, as they are contractually subordinated to the claims of external creditors.
Italy, which does not have a specific tax and legal framework for Sukuk, knows only one precedent in terms of issuance of perpetual bonds. It goes back to the fascist period when in 1935 the government issued the ITL42 billion (US$24.54 million) Rendita Italiana irredeemable bonds, which became redeemable in 1981 through a legal provision. In more recent times, the Italian government has considered issuing conventional perpetual bonds, but a decision was then made to limit the term of the issuances with longer maturities at 50 years.
It could be the time to consider a sovereign Sukuk issuance backed by those public real estate assets which are now being used by the public administration and based on an Ijarah structure with no maturity and therefore without the obligation of the originator to repurchase the assets from the SPV issuing the instruments.