Spain Said to Consider Removing Seniority of Region Fund
The Spanish government may remove a clause from its bailout fund for cash-strapped regions that gives it first claim on their revenue, according to two people familiar with the matter.
The move is intended to placate creditors who have told officials that the introduction of the regional bailout fund in July 2012 changed the terms of their bond holdings and gave them the right to call in the debts, one of the people said. Legislation may be approved as early as this month to clarify seniority, said the two people who asked not to be named because the talks are private.
With no change, holders of around 118 billion euros ($154 billion) of debt raised by the nine regions benefiting from the bailout fund would rank behind the Madrid-based Treasury for repayment. The backstop was extended to 2013 in December with a 23 billion-euro budget, almost twice the amount used last year.
“It may help to reopen the market for regions at some point,” said Ramon Nieto, a fund manager at Geroa EPSV Fondos in San Sebastian, Spain, which oversees 1.2 billion euros, including bonds from Spanish regions. “On the other hand, it could eventually increase the tensions between the central government and regions, because the state needs to get the loans paid anyway.”
The legislation being drafted would protect all creditors from subordination in the event of default by regions and not only multilateral financial institutions as is currently the case, one of the people said. A spokesman for the Budget Ministry declined to comment.
The threat of subordination makes it more expensive for local governments to sell debt. Prime Minister Mariano Rajoy’s pledge to keep funds flowing to the regions has already led the Treasury to plan a 24 percent increase in net issuance this year after overshooting its target by 55 percent in 2012.
One-third of its planned 71 billion-euro net debt issuance is earmarked for the bailout fund, known as the FLA. The Spanish regions had 167 billion euros of long-term debt in the first quarter, with 102 billion euros of bank loans and the remainder mostly bonds, central bank data show.
The nine regions that rely on the FLA for funding including Catalonia, Andalucia, Valencia, Castilla-La Mancha, Murcia and the Canary and Balearic Islands, generate more than a half of Spain’s gross domestic product, according to the National Statics Institute data.
Rajoy has kept the regions on a drip, organizing over 50 billion euros of funding through loans, transfers and special funds including the FLA to enable them to pay suppliers and redeem bonds as most were shut out of capital markets.
The removal of seniority would increase the risk of a sovereign credit-rating downgrade, said Alberto Gallo, head of macro credit research in London at Royal Bank of Scotland Group Plc. “They help the regions and banks but they increase liabilities at a sovereign level.”