Now here are some rather interesting developments in the Spanish banking arena this week.
On Thursday, Bloomberg reported how Spain’s autonomous region Catalonia has been completely frozen out of the lending market since about March.
As they noted:
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.
Spain’s regions, which borrowed at similar rates to the central government before the global credit crisis started in 2007, are key players in Zapatero’s drive to get his budget in order and push down the country’s borrowing costs. They control around twice as much spending as the state, employ more than half of all public workers and piled on debt during the recession.
The wire says banks are consequently charging Catalonia more for loans than the building companies struck down by Spain’s construction slump.
Yet, the yield on 10-year Spanish government bonds has dropped 79 basis points to 4.09 percent since June 16.
So what gives?
Well, according to BarCap, the regions might not be so behind on their fund raisings as bond market issuance figures are making out.
As they noted back in July, the regions seem if anything to have switched to direct loan financing instead:
For 2010, the financing needs for the local authorities and autonomous communities amount to roughly €30bn (2.8% of GDP), a touch higher than in 2009 (€27bn). Note that the bulk of these funding needs, €26bn or so, originate from the autonomous communities (Catalunia, Valencia, Madrid and Andalucia being the largest), and only a small amount from the local authorities (the biggest of which, by some distance, is Madrid).
After heavy issuance of bonds in early 2010 (€7.9bn up until end May), the bond issuance by these entities has been very limited more recently, raising concerns that the remaining funding needs of more than €20bn (30bn -7.9bn) will need to be covered in other ways – though our analysis of the data available in the Bank of Spain Statistical Bulletin (until the end of May), paints a slightly more benign picture. Indeed, it looks like the remaining funding needs, from end May, probably totally only €10bn, and that this could be funded via a continued increased reliance on loans, rather than through the issuance of bonds.
In fact, according to BarCap, last year the regional and local entities relied to an almost equal degree on bonds and loans to fund themselves.
And that trend is clearly re-emerging this year:
Which means only about €12bn has really been left to be funded for the year (as of the end of May).
All of which, the analysts say, can be easily achieved via a combination of bond issuance, domestic and international loans.
And with Spanish banks making eager moves into the European repo markets, their ability to raise short-term liquidity to lend out to regionals will become easier still.
Related links:
ICO, Spain’s public sector risk taker – FT Alphaville
Spanish risk: lets get regional - FT Alphaville