Government forced to step in to stop Valencia debt default

There is nothing extraordinary about the fact that the Spanish state had to help the government of Valencia meet its payments with foreign creditors, said the regional economy commissioner, Enrique Verdeguer, on Wednesday.

Calling it an isolated liquidity problem, Verdeguer claimed that the Generalitat is meeting all its financial deadlines, although he also admitted to meeting last week with the Spanish Treasury chief, Íñigo Fernández de Mesa. Shortly after that, Madrid decided to step in to ensure that the Valencian government would not default on a maturing debt of 123 million euros with Deutsche Bank.

This is the first time that the state has helped out a region - which in this case, happens to be the most indebted one out of Spain's 17 semi-autonomous communities. Valencia's debt-to-GDP ratio is 19.9 percent, and last September its deficit stood at 2.3 percent, a whole percentage point above what the state had authorized for the entire year.

Last year, the Valencian government owed providers 2.4 billion euros in unpaid bills, and pharmacies across the region recently went on a two-day strike to protest the situation. In the last few months, public workers have also been at risk of not getting their checks. But until now, banks had always been paid back promptly by a government that has already been dragged through the mud by the ratings agencies. In December, Standard & Poor's placed Valencian debt one step away from junk bond status (BBB-).

Yet commissioner Verdeguer held that Valencia has simply done the same thing that other regional governments do through collaborations with the Official Credit Institute, the Treasury and private organizations. He also said that the Spanish Treasury did not underwrite the payment to Deutsche Bank, which was one week late. Other sources at the Valencian economy department said, on the contrary, that the Treasury had indeed guaranteed the payment, while the Economy Ministry denied it.

The key lies in the fact that the arbitrated solution does not constitute a formal guarantee, since the law prevents such a thing. Experts said that it is, in fact, a verbal endorsement - in other words, the Treasury interceded so that another lender would extend Valencia a short-term credit to pay back Deutsche Bank.

Yet even this move will not resolve Valencia's long-term financial problems. The Spanish tax agency is also trying to help out by advancing the money it gives the regions from its tax receipts. Normally, this money is handed out twice a month, and the next installment was due in mid-January, but Valencia got its part on January 3 as an extraordinary measure.

Meanwhile, Valencian premier Alberto Fabra this week announced a further cut of one billion euros in regional spending that essentially cancels out the recently approved budget. The measures include eliminating 46 public agencies and leaving just six, and doing away with some of the benefits enjoyed by public servants. Regional authorities said these are exceptional measures that will only be in place for two years.