Spain to extend regional debt bailout

Spain will extend its rescue of cash-strapped regions next year, the government said Thursday, as Andalusia called for help raising funds and the region of the capital Madrid had to cancel a debt sale.

The Treasury will sell debt to finance regions that ask for it next year, said an Economy Ministry spokesman, who asked not to be named. Details still need to be worked out for the program, which will add to the planned 207 billion euros of 2013 gross issuance.

Spain’s central government has already bailed out the regions with more than 40 billion euros this year as most of the 17 states were locked out of public debt markets. The regions, which owe a combined 151 billion euros, risk adding to the burden on Prime Minister Mariano Rajoy just as he decides whether to seek a second European rescue.

“The government will likely have to finance the regions entirely next year,” said Justin Knight, a European rate strategist at UBS in London.

Andalusia, the region that is the third-biggest contributor to Spain’s economy, urged the government on Wednesday to help states finance themselves. The central administration, which lent regions money to pay their suppliers earlier this year, created a temporary fund of as much as 18 billion euros in July to allow them to meet debt redemptions.

“If financial markets’ attitude doesn’t change, regions will demand from the government a new fund or measures to help their treasuries,” Miguel Angel Vazquez Bermudez, Andalusia government spokesman, said Wednesday.

Financial markets are “totally closed” as “markets see the regions’ fund as a way to have a single interlocutor, which is the central government, and aren’t interested in other financial operations with the regions,” he said.

The region of Madrid, which has one of the lowest budget deficits and the second-largest economy, was forced to drop plans this week to sell more of its 2020 bond because of weak demand. The sale was planned for Oct. 23, the same day Moody’s Investors Service’s downgraded the credit ratings of five regions, citing “deterioration in their liquidity positions.”

Still, Madrid hasn’t requested aid from the central government as it can access markets, a spokesman for its economy department, who asked not to be named, said Thursday. Foreign investors bought most of the 653 million euros raised through bilateral funding operations in the last two weeks, including an 80 million-euro operation on Wednesday, he said.

Madrid’s regional government had its Baa3 ranking confirmed by Moody’s. That is one level above junk and the same rating that Moody’s assigns to Spain. Standard & Poor’s also rates Spain one level about junk and Fitch Ratings has it two steps above non-investment grade.

UBS estimates that between the regions’ needs and deficit slippage, Spain’s gross bond issuance requirements will be about 135 billion euros next year, dwarfing the 85 billion euros planned in Spain’s 2013 budget, based on its own calculations. Spain’s Treasury hasn’t provided a breakdown of how the 207 billion euros of total gross issuance will be divided into bills and bonds.

“There probably won’t be enough buyers for those bonds,” Knight said.