Debt market pounds Spain as concern spreads to regions
Spain's debt risk premium shattered euro-era records Friday as the government scrambled to find the money to rescue crisis-torn regions as well as the banks.
Investors fearing imminent financial breakdown sent the interest rate on Spanish 10-year government bonds spiking to 6.621 percent — a rate considered unsustainable for Madrid over the longer term.
The debt risk premium — the extra rate charged on Spanish bonds when compared to safe German debt — hit 5.48 percentage points, the fourth record in five days.
As a sense of near panic took hold, latest figures showed a net 97 billion euros ($121 billion) of investor money fled Spain in the first three months of the year — the highest on record.
At the centre of the storm, Prime Minister Mariano Rajoy and his ministers opened a cabinet meeting.
After failing to convince investors they can raise enough money to salvage a banking sector soaked in red ink, they turned their minds to deficit-laden regions, which are struggling to finance existing debts.
Spain’s 2008 property sector crash is blamed for both crises: it evaporated much of the value of banks’ real estate assets; and it eradicated at a stroke a source of plentiful income in the regions.
The challenge in both crises is also similar: wary investors are demanding such a high rate of return on Spanish debt that it is unclear how the nation can raise funds for a rescue.
Spain’s 17 powerful regions, which control health and education and account for half of all state spending, have sown deep distrust on the markets after splurging during the property boom.
On Thursday, Fitch Ratings downgraded eight regions’ credit, including that of Madrid and Catalonia, citing structural deficits, the impact of recession and their difficulty accessing long-term financing.
On May 17, Moody’s took the same action against four regions, saying they were unlikely to recover in 2012.
In 2011, the shortfall between spending and income in the regions was responsible for two-thirds of the country’s deficit slippage.
Spain registered a public deficit of 8.9 percent of economic output instead of the promised 6.0 percent last year; and the regions posted a deficit of 2.94 percent of output instead of the required 1.3 percent.
Markets fretted, therefore, ahead of the publication of first quarter deficits for each region later in the day.
This year, the regions are bound to rein in the deficit to 1.5 percent of economic output and the state has threatened to take control of those that fail to stay the course.
Many Spanish regions have found themselves shut out of the debt markets because of the high interest rates demanded by investors.
In 2012, the regions have nearly 36 billion euros to pay in debt financing, and Spanish media say they must raise another 15-16 billion euros to finance their public deficits.
The Economy Ministry said this week it would approve on Friday a scheme for the regions to jointly issue bonds, so-called hispanobonos, which would be guaranteed by the state.
But daily newspapers El Mundo and Cinco Dias said the announcement could be delayed for a week while the details are finalised.
The benefits of even this measure are uncertain, however, as the sovereign itself is viewed with such scepticism on the market.
The government rode to the rescue once already in mid-May, taking out a 30-billion-euro line of credit to help towns and regions to settle pending invoices with suppliers.
“In the end, the money comes from the same coffers, so it is going to be very expensive,” said Javier Santoma, professor at Madrid’s IESE Business School.
The state and the regions will be asking for more money from the same group of investors, with less room for negotiation, Santoma said. But “it is a way to streamline the process, to clarify who is lending and who is paying,” he conceded.
The hispanobonos would actually increase the central government’s financing requirements, said a report by analysts at Royal Bank of Scotland.
“This will only accelerate the likelihood of Spain needing some assistance, and soon,” they warned.
Spain has repeatedly denied any need for a bailout.