Spain’s plan to offer cash-strapped regional administrations emergency loans leaves the Treasury with 12 billion euros ($15 billion) of additional funding needs that the government says won’t affect its borrowing plans.
The central government will tap the lottery for part of the 18 billion-euro fund for regions, leaving 12 billion euros for the Treasury to finance. While Economy Minister Luis de Guindos said yesterday that the plan won’t affect the nation’s borrowing program, economists including Jose Carlos Diez at Intermoney SA say it will be hard to sustain without selling more debt.
“Where will it come from?” said Diez, chief economist at the Madrid-based brokerage, which is Spain’s biggest bond trader. “In the end it has to add to their financing needs.”
Spain’s Cabinet approved the creation of the fund on July 13 to help regions that have lost access to markets meet debt redemptions and finance deficits. The decree states that the facility will be funded with public debt and the Treasury’s borrowing program will “incorporate the amounts” needed.
Valencia, the second-most indebted region, said today it was preparing to tap the fund as it faces a liquidity squeeze.
“Unless they sell public companies, I don’t see any other way to do it without tapping the bond markets,” said Rafael Pampillon, an economics professor at Madrid’s Instituto Empresa business school. “There are no other options.”
De Guindos is already pushing for the government to privatize publicly-owned real estate, and a July 11 austerity plan included measures to sell off air, rail and maritime transport services.
Spain’s benchmark 10-year bond yield rose yesterday above the 7 percent level that prompted sovereign bailouts in euro nations including Greece, and traded at 7.24 percent as of 3:20 p.m. in Madrid. Debt maturing in 2020 issued by Catalonia, the biggest regional economy, yielded 13.24 percent, compared with 6.95 percent on similar notes issued by the central government.
De Guindos yesterday said the region’s funding mechanism won’t add more stress to the market, at a time when foreign investors are reducing their holdings of Spanish debt.
“The mechanism will be financed without the need to modify the Treasury’s calendar for debt sales so the creation of this fund won’t mean additional stress on the market,” de Guindos said in Parliament.
An official at the ministry, who asked not to be named in line with policy, said the borrowing program hadn’t changed and the 12 billion euros would come from the Treasury’s cash. She declined to comment further.
“They’ve probably got a war chest,” said Edward Hugh, an independent economist based in Barcelona who publishes research for Roubini Global Economics. “It’s a lot of money but it’s not the end of the world.”
The Treasury’s cash account with the Bank of Spain stood at 44 billion euros in April, according to data on the debt agency’s website.
The Economy Ministry said yesterday that the medium- and long-term issuance needs for this year were 85.9 billion euros, unchanged since the regional bailout was approved. The agency has already sold 69 percent of that amount, the ministry said.
Another factor which might affect debt-sale plans is an extension the European Union gave Spain on its budget-deficit targets, softening the goal for this year to 6.3 percent of gross domestic product from 5.3 percent targeted in the budget. The wider deficit points to gross bond issuance of 96 billion euros this year, instead of 85.9 billion euros, said Gianluca Salford, a fixed income analyst at JPMorgan Chase in London.
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