Spanish Regions’ Debt Swells as Aid Dilemma Continues: Economy

Deputy Economy Minister Fernando Jimenez Latorre
The facility, funded by a private sale of bonds to banks and a loan from the national lottery, is due to start working in October, Deputy Economy Minister Fernando Jimenez Latorre said earlier this week. Photographer: Dominique Faget/AFP/GettyImages

Spanish regions’ debt load continued to swell in the second quarter, as the cash-strapped local administrations urged the government to speed up its planned bailout fund.

The regions’ debt rose to 14.2 percent of gross domestic product from 13.8 percent in the first three months of the year, the Bank of Spain in Madrid said today on its website. The overall public debt load rose to 75.9 percent of GDP from 72.9 percent in the prior quarter.

The regions have added to the nation’s fiscal burden and the government has created a fund to help them meet redemptions. Spain is already drawing on 100 billion euros ($130 billion) for banks, and speculation is growing that it may seek a full bailout, which would enable the European Central Bank to buy bonds to bring down its borrowing costs.

“Spain is the first candidate that could use the ECB bond program,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “The household consolidation in this economically challenging environment remains a problem. We don’t think that Spain will reach its budget deficit goal this year.”

With most of the regions shut out of public markets, they have been calling on the central government to implement the fund it started to create in July. The facility, funded by a private sale of bonds to banks and a loan from the national lottery, is due to start working in October, Deputy Economy Minister Fernando Jimenez Latorre said this week.

‘Important Announcements’

The euro traded at $1.3115 as of 12:09 p.m. in London, up 1 percent on the day. The Stoxx Europe 600 Index rose to its highest level in more than 14 months after the Federal Reserve said it will buy mortgage-backed securities to encourage economic growth in the world’s largest economy.

The single currency has appreciated almost 4 percent against the dollar since Sept. 6, when European Central Bank Mario Draghi outlined the details of the government-bond purchasing plan. Under the program, the ECB would spend as much as needed to contain borrowing costs in countries such as Spain and Italy if they sign up to bailout conditions first.

Spanish Economy Minister Luis de Guindos continued to play for some time, saying that a bond-buying program won’t be on the agenda at a meeting of euro-region ministers in Nicosia, Cyprus, today. He pointed to “important announcements” on economic reforms to be made in Madrid “in coming days.”


At the same time, the country’s deepening economic slump may make it more difficult for the government to plug its budget gap. Spanish registered unemployment rose in August and industrial output fell in July from a year earlier. The euro area’s fourth-largest economy remained in recession in the second quarter, pushing the unemployment rate to 24.6 percent.

The ECB said on Sept. 6 the euro-area economy will shrink about 0.4 percent this year instead of a previously projected 0.1 percent. In 2013, the economy may expand 0.5 percent, half the pace projected in June.

In the U.S. late yesterday, Ben S. Bernanke for the first time pledged that the Fed will expand stimulus until it sees “sustained improvement” in the labor market. The central bank announced its third round of large-scale asset purchases since 2008, with the difference that it didn’t set any limit on the ultimate amount it would buy or the duration of the program.

U.S. Data

U.S. consumer prices probably rose 0.6 percent in August from the previous month, according to the median of 85 economists surveyed by Bloomberg before a report later today.

The preliminary reading of the Thomson Reuters/University of Michigan confidence index fell in September, according to another survey.

Japan lowered the assessment of its economy today, the first consecutive downgrade since the waning of the global credit crunch in 2009, fueling concern the world’s third-largest economy will contract this quarter. Japan’s “recovery appears to be pausing due to deceleration of the world economy,” the Cabinet Office said in a monthly report.

In Spain, the 17 semi-autonomous regions risk overwhelming Prime Minister Mariano Rajoy’s plan to tackle the euro area’s third-biggest budget deficit. They were responsible last year for most of Spain’s overspending, which remained nearly unchanged from 2010 at 8.9 percent of gross domestic product.

Andreu Mas-Colell, the finance chief of Catalonia, the biggest and most indebted region, said on Sept. 3 the central government should put some kind of bridge loan in place to help regions if the rescue mechanism isn’t ready in September. Catalonia’s debt rose to 22 percent of its GDP in the second quarter, from 21.2 percent in the prior quarter.

Regional Targets

The regions, which spend most of their budgets on health and education, are aiming to halve their combined budget deficit this year to 1.5 percent of GDP, as part of Spain’s overall efforts to reduce its shortfall to 6.3 percent.

“These figures can understate the real current fiscal positions of the regions,” said Ricardo Santos, an economist at BNP Paribas SA in London. “The regions may end up with deficits of 2.5 percent this year.”

Howard Archer, chief European economist at IHS Global Insight in London, said the ECB will probably continue to lower borrowing costs after cutting the benchmark interest rate by 25 basis points to a record-low of 0.75 percent in July.

“‘With the euro zone headed for a further GDP contraction in the third quarter and still facing a troubling outlook, it seems highly likely that the ECB will take interest rates down to 0.5 percent in the fourth quarter,’’ he said. A move is ‘‘very possible as soon as October.’’

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