Cheaper Liquidity Shows Central Support for Spain Regions

 

The Following Statement was released this morning by Fitch's credit ratings agency :

The Spanish government's announcement that it will further reduce the cost of the funding it supplies to Spain's autonomous communities supports our view that the central government is committed to providing liquidity support to the regions, Fitch Ratings says.

The budgetary impact of this measure will probably be limited, so it does not correct the fiscal imbalances of regional governments. But the continuing support from the central government underpins our 'BBB-' ratings floor for the Spanish regions.

The central government yesterday said it will restructure and simplify the mechanisms of support. It will also reduce the interest rate on outstanding Regional Liquidity Fund (FLA) and Supplier Fund (FFPP) facilities to 0% from 1%.

Fitch estimates that the savings in interest costs for the autonomous communities will be about EUR0.9bn in 2015 based on the EUR92.8bn total debt outstanding under the FLA and FFPP facilities as at end-2014. The central government also announced interest rates would be 0% from 2015 to 2017, under certain conditions including the compliance with fiscal targets. The central government had already announced cuts to the interest rate on the FLA funds in July. Borrowing from the FLA originally cost between 2%-5.18%, depending on when the facility was put in place. These rates were cut to 1% for the period October 2014 to December 2015, resulting in estimated interest cost savings of EUR1.5bn.

The FLA reductions announced so far are temporary, with rates due to revert to their original levels in 2016. In addition, the amortisation of FLA funds contracted in 2012 was extended to 2023, and principal payments due next year were deferred until 2016.

In April this year, FFPP interest rates on the outstanding funds drawn in 2012 were reduced by 140bp to 3.85%. Several other measures were announced yesterday, showing overall support from the central government. We do not expect the latest 1pp reduction to have a significant impact on budget balances next year. The total saving is a small proportion of annual expenditure, even for the heaviest users of the FLA and FFPP such as Catalonia, Valencia, Andalusia and Castile-La Mancha. Moreover, with regional elections due in 13 of the autonomous communities in May 2015, savings may be re-deployed in pre-election spending, eliminating any budgetary benefit. Nevertheless, it is positive for the Spanish autonomous communities in affirming the continuing support of the central government.

The introduction of the FLA in 2012 for regions that had difficulty refinancing debt in the market was a key reason for our decision to establish the 'BBB-' rating floor the following year. The floor still applies to all of Fitch's ratings in the sector, although Catalonia's 'BBB-' rating is on Rating Watch Negative due to the evolving political situation regarding relations with the central government.

We expect the central government support to be maintained as long as autonomous communities have difficulties in obtaining external financing, provided that they demonstrate commitment to fiscal discipline. The improving performance of the Spanish economy means aggregate operating revenues could increase by 2% to 3% in 2015. Even with this extra revenue, further cuts in operating costs would be needed for the sector as a whole to report a positive current balance in 2015, as they reported a negative current balance in the first ten months of 2014. After several years of cuts resulting in an operating spending fall over 2009-2013 of EUR18.2bn (or 13%), and with regional elections on the horizon, we think that further cuts will be difficult to implement.

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