Tuesday, July 17, 2012

Spain's internal version of "Stability Bond"

Remember the idea of Eurozone Bonds (not to be confused with a “eurobond” , which is something very different)? A Eurozone Bond (some have referred to the "light" version of the concept as "stability bond") is shared debt issuance by members of the European monetary union as a whole. The general concept is that current member states' debt would be exchanged for a single set of Eurozone Bonds. It is highly unlikely such structure could be implemented at this stage because it would require significantly ratifying the EU Treaties. Issuance would be based on "joint and multiple" guarantees of the member states and the current legal framework of the EU simply does not permit that.

But Spain decided to implement it anyway. Not for the Eurozone but for the Spanish regions. Spain’s regions owe billions of euros from all the years of overspending. And now they are having trouble rolling their debt. In 2012 alone the regions still need to issue €16.5bn to €24.5bn depending on the budget deficits.

Spain just announced a program (see attached) to centralize the issuance by the regions. Participation would be voluntary although most regions will have little choice but to join. The vehicle that would issue this combined debt gives explicit priority for debt holders to be repaid in full (avoiding subordination). The money raised by issuing these bonds would be lent to the regions and backed by tax revenues. Of course there are strings attached - the central government effectively takes control of the regional budgets (which may be the only long-term solution for the Eurozone as a whole).
Ministry of Economy: -

1. Fiscal Conditionality:
a) Updated Rebalancing Plans with additional information on the cash balance of each Autonomous Region
b) The Rebalancing plans must be approved by the Government
c) Monthly budgetary execution reporting and assessment on the implementation of the Rebalancing Plan
d) Additional control by State Auditor’s Office
e) Potential direct intervention of the budget accounts in case of risk of deviation from Rebalancing Plans

2. Financial Conditionality:
a) Restrictive Financial conditions for the beneficiary Autonomous Region, for new financing operations outside the mechanism (short-term loans)
b) All new debt authorisations require Treasury’s approval
c) Only current deficit needs in line with target will be funded
The funding vehicle will be capitalized with €18bn (which should cover the bulk of the funding needs for 2012, based on the range above). €6bn of that will come from the National Lottery and the rest will come directly from the central government. Over time most regional debt would be rolled into this funding mechanism. This may be the only way to arrest regional spending, which is an absolute prerequisite for Spain to get on a sustainable fiscal track.

Spain's Regional Liquidity Mechanism

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