Bloomberg News

Spain Asks Cities’ Creditors to Accept Losses in Austerity Drive

February 24, 2012

Feb. 24 (Bloomberg) -- The Spanish government seeks to ease cities’ financial woes by pushing companies to accept reduced payments in a bid to clear municipal budgets of unpaid bills.

Under the government’s plan, Spanish banks will lend money to cities so they can pay their bills, according to a statement on the website of Prime Minister Mariano Rajoy’s office. In exchange, cities must pledge to balance their budgets.

Companies that have waited the longest for payment and that agree to accept less than face value on outstanding debt will be paid first, according to the statement. Spain’s cities and regions owe suppliers as much as 50 billion euros ($67 billion), the ABC newspaper reported on Feb. 22.

The People’s Party government, in power since Dec. 21, is seeking to relieve the debt burden of cities and regions and is pushing them for budget cuts. Overspending at the municipal and regional levels contributed to Spain missing a deficit target set by the European Union last year as growth slumped, diminishing tax receipts.

The stocks of construction companies such as Fomento de Construcciones y Contratas SA, Spain’s fourth-largest builder, and Actividades de Construccion y Servicios SA, jumped on Feb. 22 after Budget Minister Cristobal Montoro said the government was working on the debt-repayment plan.

The government will set interest rates and payment delays in the next few weeks, according to today’s statement. Spanish law will be amended to enable the state to guarantee the repayment of the loans.

‘Viability Plan’

Cities have until March 15 to inform the Budget Ministry of unpaid bills and until the end of March to present plans to balance their budgets in order to qualify for the program.

“The idea is to put things in order,” Deputy Prime Minister Soraya Saenz de Santamaria told reporters in Madrid today. “Public administrations must submit to a viability plan that will lead them to meet their obligations.”

“The mechanism will be designed to be agile and have the least economic impact possible,” Saenz de Santamaria said.

The government approved a credit line of as much as 15 billion euros on Feb. 3 to help Spain’s 17 semi-autonomous regions pay suppliers and meet debt payments through June. The state-run Official Credit Institute, or ICO in Spanish, will organize the facility.

--Editor: Patrick G. Henry

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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