National government will back debt for regional governments that meet budget goals

Liquidity problems faced by Spain's regional governments were put on the table yesterday in a meeting between Budget Minister Cristóbal Montoro Romero and advisers from the Ministry of the Economy and members of the Partido Popular (PP) representing regional governments.

Montoro's emphasized balancing the budget at all costs, but as an alternative it was also proposed that the national government stand behind the debt owned by regional governments provided that these governments are complying with their budget goals. Those who do not comply would be sanctioned.

The details of the government's support have not been fleshed out, but according to government sources consulted by elEconomista, two options are under consideration initially. One of the options is most likely to go forward: regional governments that have reduced their deficit significantly, meaning beneath the limits set by the Program for Stability and Growth (Programa de Estibilidad and Crecimiento) that allows a maximum deficit equivalent to 1.3% of the GDP, will have a means to have their debt rated equally to the national government's rating. If that happens, financing would become cheaper for the regional governments. How exactly?

Essentially, the national government would issue a formal declaration that regional government debts is backed by the state.

During yesterday's debate about ratifying the Decreto de Medidas Urgentes, Cristóbal Montoro insisted that the Spanish government take control of regional government budgets and helping solve the problems afflicting them, mostly their liquidity problems. Another method for solving the liquidity problem is to use the Instituto de Credito Oficial (ICO) as a state-backed guarantor and distributor of cash resources for the regional governments. This plan resembles what Catalonian advisor Mas Colell proposed, which was to issue "hispabonos."