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Friday, October 19, 2012

Spanish regions: We hate to say 'We told you so', but...

In July, we published a briefing looking at the potential impact of regional debt problems on the Spanish economy. In particular, we noted that Spanish regions were expected to make swingeing cuts to meet the overly ambitious regional deficit target of 1.5% of GDP by the end of the year. Based on the size of cuts each region had agreed on with the Spanish government, we drew the 'traffic light' table below:

Three months later, it's time for an update. Following today's bailout requests from the Balearic Islands and Asturias, eight of 17 Spanish regions have decided to tap the €18 billion bailout fund set up by the Spanish government. And guess what? Four of them (Castilla-La Mancha, Comunidad Valenciana, Murcia and the Balearic Islands) are in the 'red' area of our table - i.e. among the regions that, according to us, had agreed to unattainable deficit reduction targets for this year. Catalonia, Asturias and Andalusia - top three in the 'amber' area - have also sought help from Madrid. To date, Canary Islands are the only surprise, as they have requested a bailout despite having to make the smallest deficit adjustment of all Spanish regions.

With only less than half of regions covered (although, of course, not all of them will need financial assistance), the Spanish government's bailout fund for regions (which totals €18 billion) has almost run out of money. Here is what each region has requested:

Catalonia: €5.4 billion
Andalusia: €4.9 billion
Comunidad Valenciana: €3.5-4.5 billion 
Castilla-La Mancha: €848 million
Murcia: €641 million
Canary Islands: €757 million
Balearic Islands: €355 million
Asturias: €262 million

TOTAL: €16.7-17.7 billion

So, if all regions obtained the entire amount they have asked for, there would be almost no money left in the pot - and two more regions in the 'red' area which may well need assistance (the case of Galicia is slightly different, as we explained in our briefing). This is why the Spanish government is trying to hold off on at least part of the loans. It has, for example, agreed to lend Andalusia only €2.1 billion, and €2.5 billion to Comunidad Valenciana - for the moment. However, regional governments will presumably push to get all the money they asked for - which in turn increases the likelihood that the bailout fund will need a top up.

We remain of the view that regional debt problems will not 'make or break' Spain financially, although depending on how the payments are handled they may increase Spain's deficit - as will the fact that the regions are still likely to miss their targets for this year. In any case, though, in the eyes of Spain's eurozone partners and the European Commission, every additional region tapping the bailout fund adds to the impression that the Spanish government is simply not capable of keeping regional spending under control. For once, we agree with the EU/IMF/ECB Troika on something.


Anonymous said...

Thanks for the analysis, good job!

Anonymous said...

Dear Open Europe,

could you give time frame of those requests by the regions, i.e. does Catalonia need the €5.4B only for 2012 or is this for this year and next year or...

My understanding is that Catalonia's debt is roughly €42B. If we assume an average maturity of 6 years, they have to roll over €7B per year plus they have to finance their current deficit. And if they lose market access, it won't be just for one year. Of course, the same holds for all the other regions. All the regions that have asked Madrid for a bailout have a total debt of approx. €100B. Which means this €18B bailout fund should be empty in less than 18 months after going into operation. And I think most of us agree that the overall situation in Spain will not improve over this period.

Open Europe blog team said...

Thanks Anonymous.

The money in the bailout fund the Spanish government set up to help regions is supposed to cover liquidity needs for this year. Catalonia has €5.7bn of debt maturing only in Q3-Q4 of 2012. Some regions are trying to get cash to pay bills from previous years (e.g. Comunidad Valenciana), but it is unclear whether they will obtain it – especially given that the bailout fund is drying up quickly. As you point out though, the funding problems for many of the regions (especially those in the red in our table) are likely to continue for some time, so it could well be that further assistance is needed.

Anonymous said...

Thank you very much, Open Europe!

I did not know that this liquidity assistance/bailout fund was put in place for 2012 only. So I guess after some delay and pray there will be discussions about a bigger fund for 2013, etc. Thank god, the country has a solid banking system and the central government is a financial powerhouse. Oh wait...

Countdown to November said...

I suppose this is the problem endemic to federalism: some of the 'laboratories of democracy' ultimately fail. Combine this with plausible threats of Catalonian secession and there is the makings of a real problem.

On a side note, I suppose I ought to write another Euro-related piece for my blog.

Rik said...

Just an earlier idea I had. Before the first Greek bail out I worked through some alternative endgame scenarios (next to a North South split for instance (the standard stuff). The main one being Germany (and Co) leaving iso the South. Politically not very likely but gaining a bit of momentum.

Another one was 'Split the South'. I havenot seen much comments on this one so will elaborate a bit further. Basically my idea was/is that Belgium would/will at some point join the PIIGS (as well a few small ones which look now to have been accepted for PIIGS membership). In all honesty Belgium looks in better shape now than expected, so might make it.
Anyway looking at the countries and leaving the small ones aside it looks clear that Greece and Portugal are not going to make it. Spain very likely not. And Italy probably not. Belgium and also France might still end up in the manure. Ireland my guess is likely to make it although a lot still has to be done (government is imho still way too expensive for what it delivers).

Not necessarily a clean bankruptcy, but far more likely with austerity fatigue in the relevant Southern country and/or bail out fatigue up North asplit up in some form will happen.

At this stage with eg Target2 going through the roof that would probably mean a lost decade (and possibly 2) for the North. And things even more disastrous in the South.

Idea. Several of the main countries in trouble are simply not real nations. Portugal and Greece are hopeless/ written off in my book at least. However if the rest was split. In 2 or in regions. And if the healthy regions, seperate or as a country (confederation), would remain in the Euro. The rest could be decoupled and let go. Much easier than a complete split off of the South (at least as far as the Euro is concerned).

The North of Italy can easily meet its debt obligations, so can basically most of the North of Spain and Flanders. This way only a relatively small part (especially seen GDP/economically wise) would go bust with banks that are hardly really systemic in most cases). The 'Southern North' would also have a proper position to restart their economies basically already from that start as everything is there. The Southern parts at least need a decade or 2 (if ever) to get going, but before that would work as a huge drag for the rest of their respective countries.
Wallonie might bankrupt inside the EZ, rest will have to leave simply will take more than a decade to get things started again if only to be competitive price-wise.

Furthermore you create a much better optimal monetary union within the present Spain and Italy. Their Souths will have to start competing and not rely on handouts from other people that they are dragging in the mud with them at this moment. Plus an EZ of more similar countries and not combine some of the most advanced countries in the World with de facto Bananarepublics.

Rollo said...

These deficits are for 2011. What are the present deficits? I imagine income this year has bitten into receipts as the result of the recession.