Spain is limiting the amount of interest its 17 semi-autonomous regions can pay to borrow, shutting many out of debt markets, as it seeks to repair the nation’s finances, two people familiar with the matter said.
The government wants administrations to pay yields no more than 100 basis points above sovereign securities when they sell bonds, said the people, who asked not to be identified before the policy is announced. Catalonia, the nation’s biggest region, pays 314 basis more than government debt on its 1 billion euros ($1.3 billion) of 4.95 percent bonds due 2020.
Prime Minister Mariano Rajoy’s goals include asserting more central control over the nation’s finances and containing local spending. Spain, which is fighting to maintain its financial sovereignty, missed the 2012 budget-deficit target set by the European Commission. Its public debt rose to 77.4 percent in the third quarter compared with 36 percent at the end of 2007 before the property bubble collapsed.
“The government needs to be sure that regions don’t hurt its efforts to get the country’s debt under control,” said Serafi Rodriguez, an Andorra-based fixed-income trader at Morabanc, which manages 6.4 billion euros of assets, including debt from Spanish regions. “Only Madrid and possibly the Basque Country and Navarra could access the market under these conditions.”
An Economy Ministry spokesman in Madrid declined to comment.
The limit applies to 598 million euros ($802 million) of bonds that Castile-Leon proposes selling after getting authorization from central government on Feb. 15, said the region’s budget spokeswoman who asked not to be identified in line with policy.
Limiting access to markets may force cash-strapped local authorities to seek aid from Rajoy’s 23 billion-euro regional rescue fund, known as the FLA, the people said. Created in July and tapped by nine regions last year, the FLA provides emergency aid in exchange for closer budget supervision.
The yield limit may also help contain the Treasury’s own interest-payments bill, the people said. Overspending in the regions was among the major reasons cited by rating companies for downgrading Spain last year.
UBS AG calculates the Treasury faces its highest borrowing needs since 2005, with 121.3 billion euros of gross mid- and long-term issuance planned for 2013. That includes 23 billion euros for the FLA, up from around 17 billion euros last year, as Rajoy has pledged to prevent any regional default.
The region of Madrid is pressuring the government to allow it to return to debt markets to meet its 2013 funding requirements. It reached its authorized limit of 2.3 billion euros in January when it sold bonds with spreads of 190 basis points to 203 basis points.
Madrid’s 1 billion euros of 5.75 percent bonds due 2018 trade at 90 basis points more than sovereign debt, compared with a spread of 190 basis points when the notes where sold on Jan. 23, Bloomberg data show.
The Basque Country’s 700 million euros of 4.15 percent bonds due 2019 trade at 105 basis points more than similar-maturity government securities, according to Bloomberg data. That compares with a spread as high as 459 basis points in October.