Spanish Government’s Liquidity Support to Regions Is Credit Positive

Spanish Government’s Liquidity Support to Regions Is Credit Positive

On 17 January, Spain’s Minister of Finance Cristobal Montoro announced credit positive measures to tackle deficits and support liquidity in the country’s 17 regions. The measures address the regions’ limited access to wholesale capital markets as well as bank loans and reflect the central government’s commitment to restoring Spain’s regional finances to a more sustainable path.

Only the broad outlines of the proposed measures are known, and we will assess the overall financial effect as specific details become known.
The proposed measures are threefold: 1) the use of state-owned Instituto de Credito Oficial to provide regions with additional funding, although the amount, cost and maturity have not yet been disclosed; 2) doubling to 10 years the regions’ repayment period for state transfers of funds in 2008-09 owing to state budget assumptions that proved overly optimistic, alleviating the regions’ treasuries of repaying approximately €2.4 billion in 2012 (or 2% of their operating revenues); 3) exceptional transfers of €4 billion that would normally have been due in July 2012 will be paid in the first half of the year. Excluding the credit lines from Instituto de Credito Oficial, the central government will have provided liquidity support of €6.4 billion in the first half of this year, when the 10 rated regions will have to service approximately €9.0 billion of debt.

While these measures will ease the regions’ liquidity pressure, the Bank of Spain’s latest published data indicate that the regions accumulated around €29.4 billion of commercial obligations at the end of second quarter 2011. This suggests a need for significant funding from the ICO, as well as the necessity for unprecedented regional fiscal consolidation to resolve the current commercial debt backlog.

The regions missed their deficit target by a wide margin in 2011 (2.7% deficit-to-GDP ratio estimated by the Ministry of Finance versus a 1.3% target). For those regions failing to comply with the deficit target, the minister of finance has proposed the gradual implementation of sanctions, which range from retaining state transfers, imposing penalties, or ultimately imposing a restructuring plan. It is not yet clear whether these sanctions will automatically apply. In addition, an organic law will set a structural deficit limit for regional administrations (e.g., the central government currently envisions 0.16% deficit-to-GDP by 2020). While set structural deficit objectives are indispensable to regaining investor confidence, in the next few months the regions need to implement spending reductions given lower expected tax proceeds in 2012 compared to their initial budget forecasts.