Business World

Friday 23 February 2018

Market tumbles as Catalonia demands a bailout from Spanish government

SPAIN’S stock market has tumbled and borrowing costs have shot up as the country's wealthiest autonomous region, Catalonia, calls for a bailout from central government to pay the bills.

"We don't care how they do it, but we need to make payments at the end of the month. Your economy can't recover if you can't pay your bills," said Catalan President Artur Mas.

The debt burden of Spain's 17 highly devolved regions and toxic property debt held by the country's banks are at the heart of the eurozone debt crisis because investors fear they could strain finances to the point that an international bailout is needed.

Just after the announcement this afternoon Spain's IBEX stock market fell 1.1pc, the yield on ten-year Spanish debt rose to 6.24pc and the euro slumped to its lowest level against the US dollar in two years, $1.2496.

Catalonia, which represents one fifth of the Spanish economy, has more than €13bn in debt to refinance this year, as well as its deficit. All of the regions together have €36bn to refinance this year, as well as an authorised deficit of €15bn.

Last year many of the regions financed debt by falling months or even years behind in payments to providers such as street cleaners and hospital equipment suppliers.

This year the central government provided them with a special credit facility from the Official Credit Institute, or ICO, to pay providers, of which Catalonia has taken €2bn.

The provider credit lines from the ICO run out in June and the central government has pledged to come up with a new mechanism for backing debt from the regions, which have been mostly priced out of international debt markets since the Greek rescue in 2010.

Catalonia's Mas, from the centre-right Convergence and Union Party, said he is running out of options. In the past two years Catalonia has placed patriot bonds, at 4.5pc to 5pc, but he says the capacity for the people of the region to buy such bonds is at its limit.

A quarter of all Catalan savings are already in patriot bonds, he said.

The other option would be short-term financing from banks, but Catalonia's neighbour, the region of Valencia, recently paid 7pc for a six-month loan, a level seen as unsustainable.

Catalonia's annual interest payments have already doubled in the last two years, to €2bn this year.

Mas said the central government should issue so-called Hispanobonos to help out the regions, priced at the average interest rate that the regions would have to pay for debt from other sources.

Government sources have told Reuters that Economy Minister Luis de Guindos and Treasury Minister Cristobal Montoro disagree on the final form of the mechanism to back regional debt.

S&P credit rating agency cut Catalan debt by four notches on May 4, putting it at BBB-, just one notch above junk grade.

Fitch has graded Catalan debt a couple notches higher, at BBB+.

Catalonia's deficit was supposed to be cut last year to 1.3pc of gross domestic product, but the regional government overshot that by close to three times.

This year it is struggling to reach a deficit target of 1.5pc of its economic output, a goal many economists see as impossible given that the Spanish economy is set to shrink this year by about 1.5pc.

Catalonia has cut public sector wages, instituted a tourism tax and a €1 charge to fill each medical prescription, applied the maximum surcharge on petrol and frozen infrastructure investments to try to get the budget under control.

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