Catalonia Negotiates 62% Cut in Payments on Infrastructure Debt

The Catalan government, whose bonds are ranked junk by two of the three major rating companies, negotiated a 62 percent reduction in repayments on public infrastructure debt in a bid to make its finances sustainable, regional finance chief Andreu Mas-Colell said.

Catalonia won agreement from lenders and contractors to defer payments on so-called public private partnerships in 2012 and 2013 cutting its outlay to 419 million euros ($568 million) from 1.1 billion euros initially agreed, according to an e-mail from the regional finance department.

“We are in a constant war to flatten out those payments,” Mas-Colell, 69, a former Harvard University economics professor, said in an interview last week. “They were structured in many cases in a perverse way.”

The region’s debt has more than tripled to 51.8 billion euros, at the end of June, compared with 14.9 billion in 2006. Catalonia, the largest regional economy in Spain, is reorganizing its finances as part of a commitment with the central government to reduce its budget deficit in exchange for 17.9 billion euros of loans provided by via rescue mechanisms.

Previous regional governments structured public-works investments with minimal payments in the initial years and an accelerating financial burden later on, Mas-Colell said.

“Whoever made them made sure to pay very little in the first years,” he added.

Caixa Loans

Mas-Colell declined to identify the financial institutions involved in financing the infrastructure investment saying only that they are the “usual suspects.”

La Caixa provided about 580 million euros of loans to finance two sections of a new metro line in the regional capital, the lender said in a December 2008 statement. Caja Madrid, since absorbed by Bankia SA, as well as Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA also lent to the project, according to the statement.

A spokesman for Barcelona-based La Caixa declined to comment when contacted by Bloomberg.

Barcelona’s Line 9 metro extension is the largest transaction financed via structured debt and involves an investment of 6.8 billion euros, according to the regional railway authority’s website.

Ifermat, as the regional railway agency is known, selected a group of companies including Obrascon Huarte Lain SA and Acciona SA to build, maintain and operate portions of the metro line. The conditions of the tender process were set in 2008, at the start of the credit crisis, when the region was run by a three-party coalition led by the Socialists.

‘Enormous Investments’

“Line 9 is this huge project that has now stopped because it’s too big, but we need to pursue it in a small way to make sure we can capitalize some of the enormous investments,” said Mas-Colell, who took office in 2010 as part of Artur Mas’s nationalist coalition Convergencia i Unio. “That’s a collection of concessions, so for each one of them we negotiated a flattening out.”

Catalonia’s debt-to-gross domestic product ratio was 26.2 percent at the end of the second quarter, compared with an average of 18.9 percent for Spanish regions, central bank data show. The Spanish Budget Ministry in August approved the region’s plan to raise its leverage ratio to 27.2 percent by year-end.

“We renegotiate constantly with financial institutions or contractors to find arrangements which are more sustainable,” Mas-Colell said.

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