Spain Prohibits Borrowing by Regions


Spain Said to Impose Yield Ceiling on Bond Sales by Regions – Bloomberg.

The Eurozone is attempting to exercise greater control over the peripheral countries by greenmail, and the Spanish central government is employing the same tricks with its regions. By capping the spread between regional and sovereign debt at 100 basis points, virtually all of the regions will be unable to borrow in debt markets. This means that they will only be able to borrow through the central government’s rescue fund with myriad strings attached.

This is a bold power move by Rajoy to peel back the autonomy of the regions. To place the scope of this policy into context, a similar edict issued by the Federal government would foreclose every state in the U.S. from borrowing money through the markets.

While his plan is to reduce the borrowing costs of the government, this maneuver will also stoke the separatist fire in Catalonia and create resentment in the other regions.

The Spanish government faces increasing pressure in 2013. Rajoy and the ruling party are in the midst of a scandal, and Spanish borrowing needs may require a resort to OMT. UBS gives the mid to long term borrowing needs as €121.3bn, but this number dramatically understates the amount of debt of all kinds Spain will need to issue to finance itself. From my post  here is a back of the envelope calculation:

  • Deficit at 8% of GDP =  €90bn
  • Maturing Debt of all durations = €128.20bn (€60bn in bonds + €68.20bn in bills)
  • Maturing Regional Debt = €15bn
  • Total Financing Needs = €233.20bn

With Spanish banks continuing to decrease their balance sheets, it is questionable as to whether or not the market will be able to absorb all of this debt. Somehow, the Spanish government will need to sell almost €20bn in debt a month. Note that Spain is already running out of domestic and Eurozone buyers and is planning to issue dollar denominated debt.


2 thoughts on “Spain Prohibits Borrowing by Regions

  1. I agree that is a risky move; as mentioned above, it will probably increase separatist pressure. Actually, the European Fiscal Pact will have a similar influence in federally organized countries – in Germany, a similar pact now is part of the constitution, forcing the states to operate completely without new debts from 2020 onwards. I expect this will lead to frictions in the federal structure at some point.

    • Juergen, I always enjoy your thoughtful commentary.

      The U.S. has a similar policy, though it is not federally mandated. Virtually every state requires balanced budgets. While the budgets are balanced every year, they all use cash accounting system so there are possibly trillions of dollars in unfunded liabilities, mostly pensions to state workers, piling up out of sight of taxpayers.

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