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Spain struggles to meet regions' 36 bln euros debts

Source: Reuters - Thu 24th May 2012
Spain struggles to meet regions' 36 bln euros debts

Top Spanish officials are at odds over how to help the country's highly indebted regions refinance €36 billion of debt this year, government sources told Reuters on Wednesday.

This figure, which was revealed in the budget plans from 17 autonomous communities, compares with previous public data of around €8 billion of bonds maturing in 2012.

The difference is due to bilateral loans from Spanish banks to the regions worth €28 billion that were not made public previously, and it could unnerve further investors concerned by the capacity of Spain to curb its public finances and reform its banking sector.

Spain's weak banks and overspending regions are at the heart of the euro zone debt crisis due to concerns that expensive bail-outs of ailing lenders, such as the country's fourth largest lender Bankia, could force the country to seek international aid.

Spain's government last week admitted its 2011 public deficit was higher than it had previously reported after 3 regions adjusted accounts.

The government sources said the central administration now aimed at putting forward a new mechanism to back regions' debt as soon as early June.

But, the sources said, Economy Minister Luis de Guindos and Treasury Minister Cristobal Montoro disagreed on the final form the new instrument should take.

De Guindos favours a centralised mechanism which would control and issue debt for the regions while Montoro would rather see a less intrusive instrument which would fall under the umbrella of his ministry and based for instance on credit lines from the central government to regions which meet their deficit targets.

"Montoro is the one who has to deal with the regions and make sure that they meet their deficit targets. You can't tell them on one side that they have to be austere and on the other side give them unlimited liquidity," one of the sources said.

CATALONIA AND VALENCIA

After weeks of negotiations, Montoro last Thursday gave his blessing to spending cuts plans presented by all 17 regions except for the small north-western one of Asturias, which will have to present a new budget within 15 days.

The regions account for around 50% of the country's overall public spending and are responsible for their healthcare and education budgets, where cuts are likely to fall.

The central government has authorised them a deficit of €15 billion this year, bringing their funding needs to €50 billion overall.

Their commitment to savings costs this year will be key to helping the country try and meet an ambitious target of slashing the public deficit to 5.3% of GDP this year from 8.9% in 2011.

The situation is however especially difficult in Spain's 2 most indebted regions, Catalonia and Valencia, which account for about 60% of all regional debt maturing this year, the data released by the regions show.

Both autonomous communities needed to refinance more than €10 billion this quarter and more than €8 billion in the second half of the year.

Earlier this month, Valencia had to pay a very high price of 7% to refinance €500 million of debt with a six-month maturity, fuelling concerns internationally about the sustainability of the country's finances.

The risk premium investors demand to hold Spanish over German debt remained steady at around 484 basis points on Wednesday after reaching last week record highs at over 500 basis points.

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