Spain Regional Rescue Risks Tipping Point On Yields: Euro Credit

Spain's plan to help cash-strapped regions sell debt risks piling additional liabilities on the central government as borrowing costs approach the level that pushed other nations into bailouts.

The government is under pressure to devise a way to help the nation’s 17 regions regain access to capital markets. Yields on 2013 debt issued by Catalonia, the biggest and most-indebted region, traded at 8.3 percent today, compared with 3.6 percent for equivalent Spanish securities and 4.3 percent for state- guaranteed bonds.

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BFA-Bankia disclosed that it would need 19 billion euros from the government, or about 1.8 percent of gross domestic product, to bolster capital and cover potential loan losses. Photographer: Angel Navarrete/Bloomberg

 

Spain is weighing how to rescue the regions as the rate on its 10-year debt moves closer to the 7 percent level that ledGreece, Ireland and Portugal to seek aid from the European Union and the International Monetary Fund. The regions, which owe a combined 140 billion euros ($175 billion), are adding to the burden as liabilities swell following the bailout of Bankia group, the country’s third-biggest lender.

“Some kind of central-government funding that gets disbursed to the regions is probably the most cost-effective way to do it,” said Harvinder Sian, a London-based fixed-income strategist at Royal Bank of Scotland Group Plc. “The problem is loading up on extra issuance at this point where the market is fragile; it could be a tipping point to get you toward 7 percent.”

Bankia Bailout

The rate on 10-year Spanish debt rose to 6.47 percent today, pushing the spread over German bonds of the same maturity to a euro-era record of 509 basis points. The yield has risen almost 50 basis points since May 9 when the government nationalized BFA-Bankia. The bank said May 25 after markets closed that it would need 19 billion euros from the government, or about 1.8 percent of gross domestic product, to bolster capital and cover potential loan losses.

Budget Minister Cristobal Montoro and Economy Minister Luis de Guindos have said the government will help regions raise funds. They haven’t said how and they’re still thrashing out details two months after de Guindos announced the idea. Regions face about 15 billion euros of redemptions in the second half of the year, according to data on the Budget Ministry’s website.

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’ revenues, 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. MORE