In Europe: Spain Edges Toward Rescue As Regions Aided: Euro Credit

24 July 2012

“Nervousness subsides over the summer and spreads come back significantly.” What a wish!

Spain’s bailout of its regions risks pushing the nation closer to a full international rescue after investors charged the nation more to borrow for five years than for a decade, threatening its access to debt markets.

Spain’s five-year borrowing costs briefly rose above 10- year yields today, and traded 5 basis points below the 7.57 percent rate on benchmark 10-year debt at 11.30 a.m. in Madrid. Bonds issued by Catalonia continued to fall after the region said it may tap the government’s rescue fund.

“It’s almost a waiting game now until they seek a sovereign bailout,” Lyn Graham-Taylor, a fixed income strategist at Rabobank in London, said in a telephone interview. The regional bailout plan was “the straw that broke the camel’s back,” he said.

Economy Minister Luis de Guindos will visit Berlin today for crisis talks with German counterpart Wolfgang Schaeuble. After taking on as much as 100 billion euros ($121 billion) of bailout loans to aid banks, the risk for Prime Minister Mariano Rajoy’s government is that the additional burden of helping regions pushes bond yields to unaffordable levels.

The Treasury paid 2.434 percent today to borrow for three months at an auction today, selling 3.05 billion euros of bills, just above its maximum target. The Treasury has focused on shorter-dated bonds to avoid paying the highest yields, a strategy that is now being undermined as five-year rates rise as high as 10-year yields. The gap between two-year and 10-year yields narrowed to 94 basis points, the lowest since December.

Unpleasant Situation

Spain’s funding costs are too high for the country to refinance itself in the long term and the situation is “very unpleasant,”Thomas Wieser, the head of a group of senior officials that prepares meetings of euro-area finance ministers, said today. Spain is “sufficiently funded well into the autumn,” he said.

“I would hope for us, and for Spain, that the nervousness subsides over the summer and spreads come back significantly,” he said in an interview on Austrian radio ORF. “Such an exaggerated spread is manageable over a few months, but of course not in the long run.”

The prospect of more regional governments following Valencia in seeking aid pushed the cost of insuring Spanish debt to a record yesterday. Spain and Italy reinstated a short-sale ban on stocks as bank shares plunged to record lows, bond yields rose and the euro traded below its lifetime average against the dollar. People who sell short hope to profit by repurchasing the securities later at a lower price and returning them to the holder.

Vacation Looms

De Guindos will meet Schaeuble before the German finance minister leaves for a three-week vacation. No press conference is planned after their talks this evening in Germany’s capital.

“I estimate a bailout could come in September or October,” Alessandro Giansanti, a senior rates strategist at ING Bank, said in a telephone interview.

Regions such as Catalonia started losing access to capital markets in 2010, prompting some to sell securities known as patriot bonds to their citizens. Andreu Mas-Colell, Catalonia’s finance chief, has called for state guarantees of bond issuance since last August.

De Guindos said in March that the central government was considering guaranteeing regions’ debt issuance. Four months later, the government created an 18 billion-euro bailout fund, with 6 billion euros coming from a loan from the state-owned lottery and the rest from the Treasury. Last week, Valencia became the first region to say it would tap the facility, prompting a surge in Spanish bond yields.

Funding Needs

“Most people didn’t realize the size of the problem,” said Ricardo Santos, a European economist at BNP Paribas SA in London. “Now that the markets are focusing on whether Spain needs a program that will require more than just support for the banks, adding the regions’ debt to the central government’s funding needs doesn’t help at all.”

While de Guindos says the program won’t increase the Treasury’s issuance needs, he hasn’t explained that position. Regions have a combined debt load of 145 billion euros, which has doubled since 2008 to the equivalent of 14 percent of gross domestic product.

The 17 states face redemptions of about 15 billion euros in the second half of this year, according to data from the Budget Ministry. They aim to run a combined budget deficit of 1.5 percent of GDP, or about 15 billion euros, a target Moody’s Investors Service says they will probably miss. The goal for next year, when the government forecasts the economy will still be shrinking, is 0.7 percent.

Boom Collapse

The regions have already received two bailout programs this year from the central government, one to help them meet redemptions and another to pay suppliers’ debts that stacked up since the collapse of the real estate boom slashed tax revenue from property transactions.

Catalonia is studying conditions attached to the latest bailout plan before making a decision, an official at the regional administration’s finance department, who asked not to be named in line with policy, said yesterday. Catalonia is already implementing record austerity measures and has called on the government to loosen the regions’ deficit targets.

Regions will be subject to “strict fiscal and financial conditionality,” and the program gives the central government access to future tax revenues to guarantee it gets repaid, the government said on July 14.

“The larger and more autonomous regions are the most dangerous,” Christian Schulz, a senior economist at Berenberg Bank, said in a telephone interview. “Catalonia is a bit of make-or-break region.”


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