Thursday, August 12, 2010

Europe Crisis Part II: Spain Deep Financial Problems Resurfacing

In a new sign that things are not well in Spain:

  • Catalonia has been shut out of public bond markets since March and the extra yield it pays over national government debt has almost tripled this year. Catalonia represents one fifth of Spanish gross domestic product.
  • Galicia, has asked to freeze payments of debt it owes the central government
  • Madrid region postponed a bond sale last month.

Bloomberg reports that Spain’s regions, which used to borrow at similar rates to the central government before the global credit crisis, are key to the government's drive to get the budget in order and push down the country’s borrowing costs. They control around twice as much spending as the state and employ more than 50% of all public servants. They also accumulated significant debt during the recession.

"Banks are nevertheless charging Catalonia more for loans than the building companies stung by Spain’s construction slump. The region, which attracts more tourists than any other in Spain, paid 300 basis points more than three-month Euribor for 1 billion euros of four-year bank loans last month, a spokesman said".

Catalonia sold 1 billion euros of five-year debt in June, but it has not issued a benchmark-sized bond in public markets since March ("even after taking a road show to Asia in April").

“Debt markets closed” as Greece’s fiscal crisis spread through the euro region in the second quarter, said spokesman Adam Sedo last month. At 5.5%, the yield on Catalan 10-year bonds is on a par with Peru."

Following Greece

In May the EU drpped the 1T bailout deal by getting around its own no-bailout clauses and backstopping countries threatened by contagion from Greece’s crisis.

"Letting a region fail would also push up Spain’s own bond yields and would be “suicide,” said the chief economist at Intermoney Valores, Spain’s biggest bond dealer.
“It would be absurd -- you don’t let a bank fail but you let a region fail?”.

"Catalonia isn’t the only region that may hurt Spain’s budget battle. The autonomous community of Madrid postponed a bond sale on July 30 because of “market conditions.” Galicia is lobbying the Finance Minister to put a moratorium on 2.6 billion euros it owes the central government and to double the time it has to pay the money back. Salgado refused on July 27".

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