Belmont Club

The Spanish Regions

Spanish blogger Jose Guardia links to a story which reminds us that Spain too has its Californias. The regions it says, may be bankrupt. So what you ask? Some of Spain’s regions are as big as Greece, that’s what. With Spain’s Socialist Party on track to losing at the polls there is every possibility that the new governments will find themselves looking at a can of worms.

One place you should know about in the coming months: Andalucia. This autonomous region, Spain’s most populated, will hold elections in March 2012. The Spanish socialist party has governed there for almost thirty years, and region has always been notorious for its lax approach to accounting principles or general administrative efficiency. …

Flashback to May 2011, when Castilla-La Mancha, another region long under socialist rule changed hands after the regional elections. The newly elected conservatives discovered to their dismay that what the socialists claimed it was a fairly balanced budget (1.5 billion deficit) turned out to be an accounting mess, with debt stuffed in every possible legal loophole (2.8 billion deficit, plus 2.2 billion in unpaid bills). Extremadura also faced similar issues, with the new communist-conservative coalition finding a bigger debt hole than expected. Neither region, howeve, is as big or as badly mismanaged as Andalucia is. Come March 2011, it is hard to imagine that the new conservative team won´t find another accounting disaster. Trouble is, this time it will be in a region four times bigger, close to the size of Greece.

Bloomberg says it is potentially a 187 billion dollar problem. “Spanish regions’ debt burden surged to a record in the second quarter, adding to pressure on the central government to rein in spending or risk missing the nation’s deficit goal.” That is bad enough on the face of it, but it could be worse if hidden debts are discovered.

The 17 semi-autonomous regions’ outstanding debt burden rose to 133.2 billion euros ($183.7 billion), or 12.4 percent of gross domestic product, from 11.6 percent in the first quarter, the Bank of Spain said on its website today. From a year earlier, the debt surged 24 percent and the outstanding amount has more than doubled since 2007. …

Spain’s regional governments are behind schedule to meet deficit targets, according to data released last week that Moody’s Investors Service called “credit negative.” … “My sense is the central government won’t be able to offset completely the slippage by the regions,” Giada Giani, an economist at Citigroup Inc., said in a telephone interview from London.

But the real problem lurking in the regions is that since they make up such a large component of Spanish debt, a credit downgrade of the regions based on the discovery of larger-than-reported debts could lead directly to a downgrade of Spanish sovereign credit ratings. A blogger at the Financial Times connects the dots. “The close credit linkages between the sovereign and sub-sovereign issuers in Spain implies that fiscal slippage at the sub-sovereign level has the potential to affect not just the ratings of Spanish regional governments but also that of the Kingdom of Spain. … Moody’s believes that the central government can probably accommodate some regional slippage by decreasing its own deficit more than the target – as it did last year.” Spanish bond yields are already up sharply — above 6% — to a new Euro-era high.

Elisabeth Afseth, fixed-income strategist at Evolution Securities, said: “The markets are very nervous and both Spain and Italy are seeing a worrying rise in yields. Spain is now seeing its yields rise in line with Italy again. Last week Spain outperformed Italy, but not today. The Italian bond auction seems to have been the trigger.”

Under these conditions, the last thing Spain needs is to have one of its larger regions report a debt blow-out. Blindness in Spain has ironically produced some of the greatest guitar playing, but blindness to deficits has not led to similar beauties.

(Note: I’ve replaced the original Paco de Lucia link with this performance by Narciso Yepes so there is no need of a continuation.)

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