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Saturday, July 21, 2012 11:06 AM


Death Spiral in Spain; Six Spanish Regions Seek Aid; Bankrupt Spain to Bail out Bankrupt Regions


Yields on 30-year and 5-year bonds in Spain hit a euro-era record on Friday as the Valencia region of Spain filed for financial assistance.

Bloomberg reports Spain Bonds Slide as Valencia Aid Request Deepens Crisis

Spain’s bonds fell, sending five- and 30-year yields to euro-era records, as the region of Valencia prepared to seek a rescue, deepening concern policy makers are failing to find solutions to the debt crisis.

“Valencia’s request for assistance underlines fears as to the central government’s ability to bring wayward regions to heel,” said Richard McGuire, senior fixed-income strategist at Rabobank International in London. “That puts Spain under a considerable degree of pressure.”

Spanish five-year yields jumped 47 basis points, or 0.47 percentage point, to 6.88 percent at 5:21 p.m. London time, after touching 6.903, the most since the euro started in 1999.

Valencia will tap Spain’s financing facility for regional governments, the area’s administration said in a statement on its website today. The funding mechanism was created last week to inject liquidity into the cash-strapped regions.
‘Death Spiral’

The Spanish 30-year bond yield climbed as much as 17 basis points to 7.35 percent, a euro-era record. The 10-year yield rose 26 basis points to 7.27 percent, having jumped 61 basis points this week. The euro-era record is 7.285 percent. The extra yield investors demand to hold Spanish 10-year securities instead of bunds widened to 613 basis points, the most since Bloomberg began compiling the data in 1993.

Spain faces a “death spiral” as higher yields push up borrowing costs, and that adds to concern the nation won’t be able to services its debt, McGuire said.
More Spanish Regions Seek Aid

On Saturday, Bloomberg reported Six Spanish Regions May Seek Bailout After Valencia
The Balearic Islands and Catalonia are among six Spanish regions that may ask for aid from the central government after Valencia sought a bailout, El Pais reported.

Castilla-La-Mancha, Murcia, the Canary Islands and possibly Andalusia are also having difficulty funding themselves and some of these regions are studying plans to tap the recently created emergency-loan fund that Valencia said it would use yesterday, the newspaper said, without citing anyone.

Spain created the 18 billion-euro ($23 billion) bailout mechanism last week to help cash-strapped regions even as its own access to financial markets narrows.
Regional Revenue Plunges

These translated paragraphs from El Pais tells the grim story.
Regional governments are choking. In recent weeks, some banks have slowed lending to communities waiting for the Government to launch the Autonomous Liquidity Fund (FLA). The autonomous liquidity has evaporated.

Although most communities have taken a severe pruning in regional expenditure, revenue is in freefall. Noninterest income of the regions fell 6.15% during the first quarter, according to the budget implementation of the regions in the first quarter of 2012. Revenues from the transfer tax and stamp duty (ITP and AJD), one of the most important to communities because they manage themselves, has fallen nearly 23% between January and April this year.

This cash has dried communities are beginning to look cobwebs in their safes. An example of the agonizing situation is suffering the autonomy of Catalonia, two weeks ago had to formalize a loan of 500 million to pay the summer bonus to its employees.
Bankrupt Spain to Bail out Bankrupt Regions

There are 17 Autonomous communities of Spain of which at least six have applied for or are expected to apply for aid.



Eventually most, if not all of those regions will request aid. Spain itself needs a bailout (which it still denies but the market is going to force any time now). The plan in place now is for the bankrupt to bail out the bankrupt.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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