The underwriting of derivative instruments in local authorities in italy: opportunities and critical issues

Abstract

Over the last twenty years in Italy, Local Authorities have walked new financial sustainability by finding alternative resources to cover their current and non-current expenses. This is due, on the one hand, to their greater financial autonomy and, on the other, to the increasing decrease in funding received from the Central Government. The use of derivative instruments (Interest Rate Swaps) reached significant quantitative levels in the past years. Subsequently, the new legislative framework introduced a more restrictive regulatory regime until the current impossibility for local authorities to subscribe to derivative instruments. The erroneous use of derivatives, which aggravated the risks associated with the debt to be incurred, and their failure to be used as part of proper debt management (liability management), led to this change in orientation. The cognitive and informative research was conducted by consulting print and digital sources. The most significant literature was extracted from the most accredited citation databases (Scopus, ISI/WOS, etc.). During the research, the author also took on the information in an experiential nature from his professional activity. It was thus possible to ascertain that most of the swap contracts entered into by Local Authorities with their chosen banking intermediaries were no longer aimed at hedging against the risk of interest rate fluctuations, but turned into dangerous speculative transactions. The Public Administration, lacking adequate expertise, was unable to correctly assess or otherwise the degree of “cost-effectiveness” of the signed contract.