Banks hold back on regions as government readies financing plan

Spain’s banks are cutting off credit to some liquidity-parched regional governments as they await news of a financial assistance plan being drawn up by Mariano Rajoy’s central administration. Sources from inside one regional government told EL PAÍS that they had in recent days all but closed a deal with several banks for a syndicated loan of around one billion euros, when the lenders froze the operation with the argument that Madrid was drawing up a nationwide rescue fund.

"We are working on a permanent solution to help finance the maturities at the regions," Economy Ministry sources said on Friday.

The mechanism, which will be announced in the coming days, is a cross between a plan the government introduced weeks ago to help the regions and town halls pay arrears to their suppliers and the Orderly Bank Restructuring Fund (FROB), which was set up by the previous administration to help struggling financial institutions. Economy Ministry officials are trying to determine the scope of the new fund and the conditions it will impose on the regions who seek financing.

Spain's regions are facing a heavy burden in trying to meet their debt repayments and problems negotiating refinancing terms with their creditors. This year, the 17 regions combined have to come up with 35.782 billion euros, with the highest share due this second quarter at 15.232 billion. Some regions have temporarily suspended their payments as they wait for the central government to bring in the long-awaited financing mechanism.

Sources from several regional governments explained that in the past few days they nearly reached a deal with various financial entities to obtain a pool credit of close to one billion euros, but the banks backed down at the last minute when they learned that the government was in the final stages of drafting its plan.

Moody's recently downgraded bonds from Valencia, Catalonia and Murcia to junk status, and reduced the credit ratings of other regions.