LITTLE ROCK — Spain’s bailout of its own regional governments is pushing the nation closer to a full international rescue, analysts said Tuesday.
A recession is deepening in Spain and a growing number of its regional governments are seeking financial lifelines. These developments are adding to the problems of a government already struggling to prop up its shaky banking system.
“It’s almost a waiting game now until they seek a sovereign bailout,” said Lyn Graham-Taylor, a fixed income strategist at Rabobank in London. The regional bailout plan was “the straw that broke the camel’s back,” he said.
Economy Minister Luis de Guindos met German counterpart Wolfgang Schaeuble in Berlin on Tuesday to discuss the crisis. After taking on as much as $125 billion of bailout loans to aid banks, the risk is that the additional burden of helping Spain’s regional governments will push bond yields to unaffordable levels.
Spanish officials had hoped a solution for the banks would ease some concerns about the state of the country’s finances and prompt investors to stop demanding unmanageably high interest rates for government debt. Such high rates forced Greece, Ireland and Portugal to seek full-blown public finance bailouts.
Investors sent the benchmark borrowing rate for Spain’s 10-year bonds to a euro-era record of 7.625 percent Tuesday, just the latest in a series of records. By contrast, Germany’s is just 1.26 percent.
If Spain’s borrowing rates continue to rise, the government may end up being locked out of international markets and be forced to seek a financial rescue that would push Europe’s rescue funds to breaking point.
Regions such as Catalonia started losing access to capital markets in 2010, prompting some to sell securities known as patriot bonds to their citizens. Andreu Mas-Colell, Catalonia’s finance chief, has called for state guarantees of bond issuance since last August.
Spain’s funding costs are too high for the country to refinance itself in the long term and the situation is “very unpleasant,” said Thomas Wieser, the head of a group of senior officials that prepares meetings of euro-area finance ministers. Spain is “sufficiently funded well into the autumn,” he said.
The prospect of more regional governments seeking aid pushed the cost of insuring Spanish debt to a record Monday. Spain and Italy reinstated a ban on short-selling stocks as bank shares plunged to record lows, bond yields rose and the euro traded below its lifetime average against the dollar. People who sell short hope to profit by repurchasing the securities later at a lower price and returning them to the holder.
“Most people didn’t realize the size of the problem,” said Ricardo Santos, a European economist at BNP Paribas SA in London. “Now that the markets are focusing on whether Spain needs a program that will require more than just support for the banks, adding the regions’ debt to the central government’s funding needs doesn’t help at all.”
The 17 states face redemptions of about $18 billion in the second half of this year, according to data from the Budget Ministry. They aim to run a combined budget deficit of 1.5 percent of GDP, a target Moody’s Investors Service says they will probably miss. The goal for next year, when the government forecasts the economy will still be shrinking, is 0.7 percent.
Spain’s regional governments have already received two bailout programs this year from the central government.
The regions will be subject to “strict fiscal and financial conditionality,” and the program gives the central government access to future tax revenues to guarantee it gets repaid, the government said July 14.
Information for this article was contributed by Emma Ross-Thomas, Maria Tadeo and Boris Groendahl of Bloomberg News; and by Harold Heckle and Alan Clendenning of The Associated Press.
Business, Pages 25 on 07/25/2012