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FINANCIAL CRISIS
Risk premium tops 600 for first time as Valencia asks for rescue funds
Region is first to ask for emergency financing from the newly created LFA liquidity mechanism
Spain’s risk premium shot to a new record high on Friday after officials in Valencia formally asked the central government for funds to help pay the region’s surmounting bills, including the high prices of prescription drugs.
The cost of servicing Spanish debt rose to 7.22 percent after midafternoon with the risk premium reaching 606 basis points over the benchmark German bund. It was the first time that the figure has climbed to over 600 points since the start of the euro-zone debt crisis two years ago.
Following Friday’s weekly Cabinet meeting, Finance Minister Cristóbal Montoro announced that the government was cutting its economic growth forecasts for 2012 and 2013 based on the rise in interest rates Spain will have to pay for its debt, hikes in Social Security costs and increases in pensions. The minister said that public spending could rise by as much as 9.2 percent in 2013.
Montoro said at first that he wasn’t aware that Valencia government officials had announced about an hour earlier that they would be the first region to formally tap into the Regional Liquidity Fund (FLA), a system that was created just over a week ago which will allow cash-strapped regions to access financing but under stringent guidelines.
“Valencia is not getting a rescue,” said deputy regional premier José Císcar during his own news conference. “We are tapping into a mechanism of financing which more regions will be using in the coming days, but without any more adjustments.”
After first denying it, Montoro explained that the region will tap into FLA and “be obligated to follow new conditions.”
Císcar declined to put a figure on how much Valencia would need, but some financial forecasts show that the region may require as much as three billion euros in emergency funding.
The proposed 18-billion-euro FLA reserve will be financed mostly by state-administered public debt, plus a loan from the national lottery agency to the tune of six billion euros.
Valencia is Spain’s most indebted region, followed by Catalonia and Andalusia. Last May, Catalan premier Artur Mas publicly asked the central government to come up with a mechanism to help regions pay their bills.
Also on Friday in Brussels, euro-zone finance and economy ministers approved the terms of a loan of up to 100 billion euros that will be available to recapitalize Spanish banks. The exact amount required won’t be known until September after the results of in-depth audits conducted by the Spanish government are known.
Among the terms, Spain will have restructure its banking sector and improve governance and regulation, the Eurogroup said in a statement. The agreement came shortly after the Finnish parliament approved granting Spain its portion of the bailout. On Thursday, the German parliament also voted in favor of granting Spain the funding.
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