Spain Offers Debt-Pressed Regions Cash, Loans in Next Weeks

Spain’s central government will provide a credit line and other liquidity measures to ease pressure on cash-strapped regions while demanding tighter deficits in return, Budget Minister Cristobal Montoro said.

The central government in the coming weeks will pay the regions an 8 billion-euro ($10 billion) transfer that had initially been scheduled for July, Montoro told radio station Cadena Ser in an interview today. It will also offer loans via the Official Credit Institute to help regions settle bills for suppliers in a couple of months, he said.

“We are submitting these mechanisms on the condition that the regions present fiscally viable plans,” said Montoro. He first announced the measures yesterday after meeting with regional finance chiefs following a pledge by Prime Minister Mariano Rajoy to “rescue” regions with liquidity problems.

The 17 semi-autonomous regions control more than a third of Spain’s public spending, including health and education, and caused the nation to miss its budget-deficit target last year. The liquidity measures are designed not to affect the deficit, skirting a law forbidding direct bailouts.

Yields Stable

The yield on Spain’s benchmark 10-year bond was 5.125 percent at 1:20 p.m. in Madrid, compared with 5.134 percent yesterday. The yield difference with equivalent-maturity German bunds was 334 basis points.

Spain is copying European fiscal rules to “introduce discipline,” Montoro said, as he raised the possibility of pursuing politicians who overspend with criminal charges.

“A manager of public funds can’t spend more than his budget,” he said in the interview.

The size of the credit line from the state-backed ICO, designed to allow regions to pay off debts accumulated to suppliers, is still to be determined, Montoro said yesterday. Regions will also get an extra five years to pay off 31 billion euros they owe the central government, he said.

Many regions are shut out of public-debt markets. Valencia, the most indebted, was forced to delay repayment of a loan due to Deutsche Bank AG in December by a week.

Regional Spreads

The spread between the yield on 2020 bonds of Catalonia, the wealthiest region with an economy the size of Portugal’s, and Spain’s today narrowed to 435.1 basis points from 436.2 basis points yesterday. That’s about a percentage point more than the yield gap between Spanish and German borrowing costs.

“We are going to ask the regions to meet their 2012 deficit targets and to have spending and debt ceilings, and we are willing, if some have liquidity problems, to rescue them,” Rajoy told a joint news conference with European Union President Herman Van Rompuy in Madrid yesterday.

The People’s Party government, in office since December, also plans to pass a stability law to flesh out the details of a constitutional amendment on balanced budgets that the previous Socialist government passed in September with Rajoy’s support. Montoro discussed the bill with the regional chiefs and said there was “broad support” for budget stability.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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