Cost-conscious Spain may underwrite regions' debts

 

Spain's central government, seeking to allay concerns its grip on its finances is loosening, may move to cut debt servicing costs for its struggling regions by underwriting a new class of bond.

The 17 autonomous regions, which manage their own health and education budgets, account for around half of Spain's public spending and were a key reason the state missed its deficit target by a wide margin last year.

Since then the government has persuaded EU authorities to ease a 2012 deficit target, unnerving markets and leaving it with a bigger budget gap to close next year in a contracting economy.

Allowing the regions to issue bonds underwritten by the central government, known as 'hispanobonos', would cut their debt issuance costs, which are way above the state's - thereby easing Spain's overall fiscal burden.

The idea was floated by several regions last year, including the wealthy north-eastern area of Catalonia.

"It's one of the options being considered so regions have better access to capital markets. It's one of the options on the table, among others," an economy ministry spokeswoman said.

A market maker for Spanish debt said the idea was being discussed but was still at an early stage.

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The regions struggled for access to capital markets last year, and in many cases pay 200 basis points or more over what the Treasury pays on its own debt.

Already under intense pressure to slash spending and reduce their budget gaps, the regions would likely have to meet strict fiscal obligations to qualify for the new debt.

A source at the Economy Ministry said last week that measures such as issuing 'hispanobonos' could save the regions up to 1 billion euros a year.

"In times of crisis, it's hard to understand why the regions have to pay more than necessary to finance themselves," the source said.

Among the larger states on the euro zone periphery, Spain has in recent weeks replaced Italy as the main focus of concern among investors.

Madrid's financing costs rose significantly on Thursday, with the key 10-year bond yield up around 10 basis points at 5.5%.