Rajoy Pressured to Seek Full European Bailout

Spain’s regions are adding to pressure on Prime Minister Mariano Rajoy to seek a European bailout as the funding needs of the country’s cash-strapped states swamp government expectations.

Nine of the 17 states have already requested support worth 93 percent of Spain’s 18 billion-euro ($23 billion) regional rescue fund, known as FLA. While the 10-year Spanish bond yield has fallen 251 basis points from a euro-era record of 7.75 percent on July 25, most of the states remain shut out of markets, forcing the government to weigh the cost of extending the rescue facility for another year.

Spanish 10-year bonds erased an advance, with yield on the securities little changed at 5.36 percent as of 3 p.m. London time. The rate dropped as much as 13 basis points earlier today to 5.2 percent.

Rajoy, who is battling to avoid a European bailout, created the rescue fund in July to protect the semi-autonomous regions from default. With the states failing to regain investor confidence and the recession further undermining their budgets, the mounting funding needs may strain the Treasury’s capacity to raise enough cash.

“It was a Band-Aid applied to a very deep fiscal gash,” said Michael Derks, chief strategist at FxPro Group Ltd. in London. “It is clear to all that Spain must apply for substantial aid at some point and the longer it takes for them to do so, the bigger the likely sum involved.”

The central government still needs to raise 6 billion euros for the fund, a third of the total. It may face further requests for funds for this year before the Dec. 3 deadline. The Budget Ministry says 30 percent of the total remains available as the amounts that regions have asked for don’t correspond to the sums that have been approved.

The ministry granted Valencia, Spain’s second most indebted region, Andalusia, the most populated, and Castilla-La Mancha, just 56 percent of the amount they requested. Each region’s share is rationed in line with its bond redemptions and the size of its economy. The government hasn’t decided what to do with the funds that were earmarked for regions such as Madrid that aren’t seeking help, a ministry spokesman said.

Rajoy’s People’s Party, which rules in most of the regions, has proposed at least 23 billion euros for the FLA next year, even as the government says it’s still calculating how much will be needed. That would be less than half the total amount the central government is pumping into the regions this year, including the FLA and loans to help them pay suppliers.

The government says it’s calculating how much will be needed next year for the regions. At 23 billion euros, more than half the fund would be used by Catalonia alone, according to Fitch Ratings, which estimates the biggest regional economy has 13.6 billion euros of debt maturing in 2013.

Overspending by the regions is one of the main reasons Spain has failed to meet its overall deficit-reduction goals. The shortfall remains more than twice the European Union limit of 3 percent of gross domestic product, second only to Ireland.

“The regions pose the biggest risk to Spain meeting its targets next year,” said Georg Grodzki, London-based head of credit research at Legal & General Investment Management Ltd., which manages $622 billion of bonds. “Rajoy is challenged to wrestle back fiscal powers from the regions after a decade of fiscal devolution and increasingly rebellious donor regions.”

Via – Bloomberg

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