Spain is considering guaranteeing joint regional bond issues with tax revenue, three people familiar with the plans said, as the government seeks to help regions access markets without overburdening the central administration.
Under the plan, regions would set aside tax revenue in a deposit account to guarantee that holders of the bonds issued for regions get paid first, said the people, who declined to be identified as the proposal isn’t public.
Spain is weighing how to help regions regain access to markets as the rate on its 10-year debt approaches the 7 percent level that led Greece, Ireland and Portugal to seek aid from the European Union and the International Monetary Fund. The government is trying to avoid allowing the regions, which owe a combined 140 billion euros ($175 billion), to add that burden as its liabilities swell following the bailout of Bankia group, owner of Spain’s third-biggest lender.
“It would provide some comfort to investors at a time when a guarantee from the Spanish sovereign is not exactly gold plated,” said Harpreet Parhar, a London-based strategist at Credit Agricole SA in London. “It’s an interesting idea.”
Spokesmen at the Economy Ministry and the Budget Ministry in Madrid declined to comment. Budget Minister Cristobal Montoro said on May 21 any support mechanism used to help regional governments access capital markets won’t jeopardize Spain’s credit rating.
Montoro and Economy Minister Luis de Guindos have said the government will help regions raise funds, without saying how. Regions face about 15 billion euros of redemptions in the second half of the year, according to data on the Budget Ministry’s website.
The government will take whatever measures are necessary for the regions while it is up to Spain’s Cabinet to decide about so-called hispabonds, Deputy Budget Minister Marta Fernandez Curras said during a news conference in Madrid today.
Spain’s regions control about a third of the nation’s public spending, including health and education, making them crucial to the nation’s efforts to rein in the euro region’s third-largest budget deficit. Part of regional revenue comes from their share of personal income and sales taxes transfers from the central government.
The budget deficit of the central government in the first four months widened to 2.39 percent of gross domestic product from 1.57 percent a year earlier after it provided more than 5 billion euros of liquidity support to the regions, Curras said today.
Without the measures, the shortfall would have been 1.43 percent of GDP. The central government will still meet its target of 3.5 percent GDP for the full year, which is part of the nation’s overall goal approved by the European Union of 5.3 percent of GDP, Curras said.
On May 16, the government finalized a rescue to help regions and town halls settle their unpaid bills with lending backed by the local administrations’ revenue, the Economy Ministry said. The government organized a 30 billion-euro syndicated loan from banks, guaranteed by the Treasury, which in turn is backed by regions’ and town halls’ receipts from the central government.
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