Spain’s peripheral problems – €26.4bn of hidden debt?
Posted by Tracy Alloway on May 18 09:44.

This was a Tuesday headline to catch one’s eye:

‘Hidden’ debt raises Spain bond fears

Dug up by the FT’s Victor Mallet — it’s based on a report from Freemarket Corporate Intelligence, a consultancy run by Lorenzo Bernaldo de Quirós, an economist critical of Spain’s devolved system of government. It’s also in Spanish, which means we’ve relied on Google Translate for large swathes of it.

So with political posturing and language barriers firmly in mind, here are some excerpts:

Apart from its political significance, regional and local elections next May 22 are exceedingly important, as the economic and financial situation facing the autonomous regions and municipalities poses serious risks to the stabilization of public finances in the entire State. In the context of resurrection of the debt crisis at the European level, questioning the accounts of peripheral administrations resulting from the emergence of a high potential hidden debt would seriously undermine [and on] the other hand modest fiscal consolidation strategy and budget Government of Spain that is clearly insufficient to stabilize and/or cut the rising trend of deficit-debt binomial. In this case, Spain would again be in the spotlight of the markets, which would constitute a serious risk to finance public sector imbalances and resurrect the ghost of a debt crisis.

The thinking is that after local elections on May 22, any incoming politicians will seek to clarify their council’s debt status — meaning they could reveal larger than expected deficits and the like.

Spain’s 17 autonomous regions have almost doubled their public debt to more than €115bn since 2008, according to data from the Bank of Spain (which is calculated according to EU guidelines). Spain’s central government has €488bn. This, reckons Freemarket, is something of a problem in the current climate:

Over the past 25 years, the peripheral government debt has increased 20-fold and its share in GDP has grown from 2.7 per 100 in 1984 to 14.2 per 100 in 2010. Although from low levels, this upward trend is disturbing, especially when taking into account the high growth rates recorded by the Spanish economy during the period. The longest growth cycle of the past 35 years could and should have … cut that debt, [but] by contrast, has continued to grow in the years of expansion and has overflowed during the recession.

…

Moreover, the territorial government['s] borrowing [is] more expensive and has outgrown the state. On average, during the upswing of the cycle, the risk premium of debt securities issued by the HHTT was between 40 and 80 basis points higher than that paid by the Central Government. That is, markets have always relied less on budgetary discipline capability of the CCAA and its relative creditworthiness in the state. Following the crisis, the spread between autonomous and the state has expanded even more and in some cases has resulted in the de facto closure of the regional debt markets or the demand [of "Greek-like] risk premiums [that] will be impossible to pay on a stage of stagnation of the national economy. According to the latest data available, the risk premium on debt issues by the Spanish regions is between 350 and 450 basis points above that paid by the 10-year German bond, while the state fluctuates in recent months between the 186 and 290 basis points. That is, markets [that] have little confidence in the Spanish debt[, have] even less in the payment capacity of regional farms, posing a serious risk that those not funded in the coming months.

And this is also where the ‘hidden debt’ stuff comes in, or as Freemarket puts it “the debt that Europe does not count.” From what we understand, it basically involves companies owned by local and regional governments, who either issue debt sort of off-government balance sheet, or leave their bills unpaid.

About 5,200 regionally-owned corporates have some €26.4bn worth of debt that isn’t included into Spain’s official accounts (of the €115bn), Freemarket says. Here’s more from the consultancy:

Partner companies to [Spanish regions are] not included in their budgets, are growing trends in debt, well above the “official debt” of HHTT, especially since 2004.

As shown in the chart that follows the growth of this debt is exponential.

The analysis of government indebtedness of the subsidiaries of which can be drawn:



1 .- The trend of borrowing by companies affiliated to the Admon. Peripheral is much higher than total official debt of the HHTT. The debt of these “public enterprises ” regional and local accounts for more than a sixth of the total debt HHTT.

2 .- The change to the ESA-95 methodology has not resulted in a reduction of debt “extrabudgetary” Quite the contrary, the increase has been strengthened and the number of corporate debt has quadrupled.

3 .- The creation of enterprises and their debts are therefore independent of the political party is in power. Public enterprises have proliferated in territories ruled by all political parties. The left, right and nationalists have shown the same spirit foundation.

4 .- The creation of public companies by the CCAA has been used systematically to escape the debt limits that are imposed by the autonomy law…

Whatever you think of the report, it looks like Spain might have a new pressure point — this Sunday.

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