Under Italian legislation local authorities can determine the conditions and the structure of their debt and can operate according to discretionary powers, although this must be in compliance with the general conditions provided by law.
Law No 539 of December 20 1995 allows Italian local authorities to reduce the costs of their outstanding financings entered into in the form of loans through renegotiations with the relevant lenders.
Law No 448 of December 1998 introduced the so-called domestic stability pact (Patto di Stabilità Interno) under which local authorities were called on to aim for public finance targets through a commitment to progressively reducing the ratio between their liabilities and GDP.
A restrictive interpretation of the existing legislation would lead to the unacceptable conclusion that local authorities could not improve the terms of their outstanding indebtedness as a consequence of market changes unless the relevant lender was willing to accept a reduced interest rate.
However the Patto di Stabilità imposes a more flexible interpretation of the existing legislation and, although there is no express provision of law that authorizes local authorities to use derivatives to remodel their outstanding debt, such a recourse should not be precluded.
Derivatives would give local authorities the opportunity to remodel their financial exposure without modifying the outstanding loan agreements with the banks should the relevant lenders be unwilling to accord a readjustment of the terms of the original financing in line with market trends.
Moreover, Legislative Decree No 267 of August 18 2000 has confirmed the maximum ceilings for debt and for interest rates applicable to funding for local authorities within which local authorities are free to operate and manage their debt.
Hence, in accordance with the existing legislation, local authorities:
- are authorized to make recourse to derivatives, also for the purpose of renegotiating the terms of the future reimbursement of their indebtedness;
- must enter into such transactions considering the economic balance of the local authority;
- need to obtain the appropriate internal authorizations; and
- any burden in excess to those pertaining to the original transaction will have to be properly documented and registered in the accounts of the local authority in accordance with the general provisions of law and relevant accounting principle.