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You Don’T Let A Bank Fail But You Let A Region Fail?

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Spanish Crisis Threatens Second Front as Catalonia Rates Rise http://www.bloomberg.com/news/2010-08-11/spanish-crisis-threatens-second-front-as-regional-borrowing-costs-increase.html

Prime Minister Jose Luis Rodriguez Zapatero may face a second front in his battle to contain Spain’s fiscal crisis as borrowing costs for the country’s regional governments climb.

Catalonia, which accounts for a fifth of Spanish gross domestic product, has been shut out of public bond markets since March and the extra yield it pays over national government debt has almost tripled this year. Galicia, in the northwest, has asked to freeze payments of debt it owes the central government and the Madrid region postponed a bond sale last month.


The yield on 10-year Spanish government bonds has dropped 79 basis points to 4.09 percent since June 16, according to Bloomberg generic prices. The extra return investors demand to hold the debt rather than German equivalents was at 165 basis points today, down from a euro-era high of 221 points two months ago.

Banks are nevertheless charging Catalonia more for loans than the building companies stung by Spain’s construction slump.

The region, which attracts more tourists than any other in Spain, paid 300 basis points more than three-month Euribor for 1 billion euros of four-year bank loans last month, a spokesman said. Fomento de Construcciones & Contratas SA, Spain’s fourth- largest builder, said on Aug. 2 it agreed to pay a 260-basis point spread to extend 1.1 billion euros of loans until 2014.

While government records on Aug. 9 show that Catalonia sold 1 billion euros of five-year debt via savings bank La Caixa in June, it hasn’t issued a benchmark-sized bond in public markets since March even after taking a road show to Asia in April. “Debt markets closed” as Greece’s fiscal crisis spread through the euro region in the second quarter, said spokesman Adam Sedo last month.

At 5.5 percent, the yield on Catalan 10-year bonds is on a par with Peru.

Greek Fate

The regions’ budget problems come as Zapatero tries to convince investors that Spain can avoid the fate of Greece, which was forced to seek a European Union-led bailout this year after its deficit ran out of control. Zapatero, his popularity slumping in opinion polls, is pushing through the deepest austerity measures in three decades and borrowing costs have declined since officials last month published stress tests on Spanish banks.

The regions’ borrowing difficulties will likely complicate their relationship with the Madrid government. While Catalonia is pushing for more autonomy and Spanish law prevents the central government from bailing out the provinces, some investors expect it would do so if necessary.

‘Big Brother’

“There’s a certain perception that there’s a big brother standing behind,” said Diego Fernandez, a fund manager who helps oversee 240 million euros at Inverseguros in Madrid and is cutting holdings of regional debt. “There could be a region that has more difficulties and so would need some help, which wouldn’t materialize as a bailout but as some kind of larger transfer.”

The EU got around its own no-bailout clause in May and backstopped countries threatened by contagion from Greece’s crisis. Letting a region fail would also push up Spain’s own bond yields and would be “suicide,” said Jose Carlos Diez, chief economist at Intermoney Valores, Spain’s biggest bond dealer.

“It would be absurd -- you don’t let a bank fail but you let a region fail?” he said.


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  • 396 Brexit, House prices and Summer 2020

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