Spain Threatens Deficit-Troubled Regions, Offers Help

Spain’s government threatened to take control of budgets in regions that fail to meet austerity targets, while offering financing to help them avoid default as the nation battles to restore investor confidence.

Regions projected to miss deficit goals this year were given a week to take action or risk intervention, Budget Minister Cristobal Montoro said in Madrid late yesterday after meeting regional finance chiefs. Local officials, including some from the ruling People’s Party, resisted his demands.

“This proposal has more show than go,” said Michael Derks, chief strategist at FxPro Group Ltd. in London. “Spain isn’t in any position to take on more obligations and this isn’t going to repair the credibility of regional governments that have been shut out of markets for a considerable time.”

The Cabinet will examine today a mechanism to provide exceptional assistance with bond redemptions to regional governments that are shut out of markets, Montoro said. The aid will be conditional on additional budget cuts.

Ministers will approve Spain’s fourth round of austerity in six months to comply with European Union demands and convince investors it won’t need a second bailout. The plan also aims to prevent regions from defaulting as the yield on Spain’s own 10-year debt yields almost 7 percent amid narrowing access to markets.

Chiefs’ Pleas

Yields on debt maturing in April 2013 issued by Catalonia, the biggest regional economy, were little changed at 16.4 percent at 12:29 p.m. in Madrid. Spanish yields of the same maturity rose to 3.71 percent today from 3.56 percent, while the nation’s 10-year benchmark yield rose to 6.66 percent.

Montoro rejected pleas from finance chiefs to relax the 1.5 percent deficit target for this year after the EU gave the nation leeway to meet its overall goal. Accepting a 0.2 percentage point increase in next year’s goal to 0.7 percent of each region’s gross domestic product, he toughened goals for 2014 and 2015.

Four of the 17 semi-autonomous regions voted against the targets and two regions ruled by the PP joined the rebellion by abstaining. Decisions are taken by majority.

“We have already made a huge effort and we wanted some respite before intensifying budget cuts,” Antonio Fernandez, economy chief of Extremadura, where the PP governs in a coalition, told reporters.

Government Intervention

Montoro declined to identify the regions that risk overshooting this year’s goal or specify how many they are. Spain’s Cabinet may apply in one week the budget-stability law that enables the government to intervene in regions, he said. When that law was passed earlier this year, Montoro compared such intervention to EU and International Monetary Fund missions to Greece to oversee that nation’s bailout.

Eight states may be involved, including Valencia and Catalonia, Expansion newspaper reported, citing people in the regions it didn’t identify.

Some regions have been locked out of public debt markets for more than a year and Antonio Beteta, one of Montoro’s deputies, said yesterday they could no longer obtain financing from banks. The government, which sought a European bailout for its banks last month, has said it won’t let any regions fail.

The government will create a state-guaranteed fund that regions can turn to in order to repay debt in exchange for further budget cuts, Montoro said, without specifying whether the fund will issue debt or pool loans, following the model used to clear unpaid bills this year.

Flexible Instrument

“What the Treasury will do, once it identifies the regions’ needs for liquidity and redemptions till the end of the year, is that it’ll guarantee their needs are met,” Deputy Economy Minister Fernando Jimenez Latorre told reporters in Madrid today. “This won’t create doubts on its own rating because the access to the funding will obey to strict conditionality.”

Latorre said the system will remedy to the regions being shut out of markets without hindering fiscal discipline. “On the contrary, it reinforces the tendency to consolidate public finances,” he said.

The mechanism turns its back on the joint debt sales announced by Economy Minister Luis de Guindos on March 27 backed by a guarantee from the national Treasury and aimed at reducing borrowing costs. “This idea of hispabonds in the sense of mutualizing risk has never been on table,” Montoro said yesterday.

Regional Budgets

Montoro refused to provide any amount for the fund, saying he doesn’t expect big amounts.

Cash-strapped since a post-real estate boom recession shriveled tax receipts in 2008, the regions accounted for 69 percent of Spain’s overspending last year. They ran a deficit of 3.3 percent of GDP.

The government has demanded they cut the shortfall to 1.5 percent this year after keeping them afloat in the first half by bringing transfers forward and organizing 35 billion euros ($43 billion) in loans.

The aid balanced regional budgets in the first quarter at the central government’s expense, causing its deficit to swell to 3.41 percent of GDP in the first five months of the year, close to its own full-year goal.

Catalonia, Valencia and Andalusia, which account for 42 percent of the economy, are each rated junk or one notch from junk by at least one company.

Spain’s regions face about 15 billion euros of redemptions in the second half of the year, which will add to Spain’s swelling debt burden following the bailout of Bankia group, the country’s third-biggest lender.

Deficit Targets

Prime Minister Mariano Rajoy said on July 11 the new deficit targets set by the EU for Spain this week take into account the country’s recession, its second since 2009.

The budget target shared by the state, the regions, the town halls and the social security was raised to 6.3 percent of GDP from 5.3 percent for 2012, 4.5 percent from 3 percent in 2013 and 2.8 percent from 2.2 percent in 2014.

Starting from July, regions will publish monthly budget data, instead of every quarter, according to a statement released by the Budget Ministry following the meeting. The government has also asked regions to provide budget plans for the next two years, in the same way Spain has been asked to provide them to the EU, the ministry said in a statement.

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