Fisher Investments Editorial Staff
Developed Markets, Deficits

Spain, Spain, Spain

By, 07/24/2012

El Reino de España hogged headlines on Monday, as Spain’s troubled regions began requesting aid from a new bailout fund. The news helped send sovereign yields higher and renewed jitters over a full Spanish bailout—jitters that seem a touch overblown, in our view, when one considers the specifics of Spain’s regional debt situation and the means already in place to support it.

High deficits in Spain’s 17 autonomous regions have long been a thorn in the central government’s side. Regional governments control health, education and a chunk of public infrastructure spending, and some have racked up tens of billions of euros in debt over the years. In fact, while Valencia became the first to request help from the newly established Liquidity Fund, it’s not the first region to receive a state bailout.

In February, Prime Minister Mariano Rajoy repurposed Spain’s development bank, the Instituto de Credito Oficial (ICO), as a regional funding lifeline. The ICO was projected to raise €20 billion via debt issued on primary markets this year (with €15 billion earmarked for the regions)—at last count, it’s raised more than 60% of this. Conveniently, it also has a banking license, permitting it to borrow from Spain’s central bank and the ECB—where it can park a wide range of collateral and access funds at a cheap 1% should primary debt markets prove too expensive. Catalonia, home to Spain’s largest regional economy, tapped the ICO for €2 billion earlier this year.

ICO funds remain available, but Spain devised an alternate regional bailout scheme, the aforementioned Liquidity Fund, on July 13. Where the ICO must borrow funds, the Liquidity Fund is funded with cold, hard cash—largely repurposed from Spain’s national lottery. Thus, it provides a way of backstopping regional governments without adding to national debt. It’s also not a free pass for Valencia—or Murcia, Andalusia or any of the other regions reportedly considering asking for help. All must commit to severe budget cuts and will be subject to regular audits, just as Catalonia did in exchange for ICO assistance.

Hence why we’re a tad puzzled by the commotion over Valencia’s request for help. Yes, the situation itself isn’t great for Valencia, and the region will need to make some difficult adjustments. But that Spain found a better means of backstopping its regions ahead of actual need—one that shouldn’t add to Spain’s debt load, at least for now—and that regions are availing themselves of it rather than exacerbating borrowing costs by paying high yields at market, seems a rather helpful development to us.

Meanwhile, Spain’s central government pressed ahead with economic and labor-market reforms—including a new law aiming to put the traditional siesta on permanent siesta. The law permits retail shops to stay open for 90 hours each week, up from 72. Officials hope this spells the end of the two hour-long post-lunch break—and the lost productivity it brings. Now, doing away with national naptime may not seem like much. But considering how culturally entrenched the siesta is, this reaffirms officials’ dedication to making the tough choices necessary to improving economic competitiveness.

And that dedication, demonstrated repeatedly in recent months, is what seems likely to keep EU officials willing to compromise with Spain as it continues trying to pull through without a full bailout.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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