Ministry of Economy uses ICO to give credit to regional governments, but interest unclear

Cristóbal Montero announced it last Thursday: "We have to strengthen credit lines within the Instituto de Crédito Oficial (ICO), because when it comes to facilitating payment to credit providers, any step forward is a good step." Just one week later, the Spanish government approved a new line of credit from the ICO, providing 10 billion euros, capable of being stretched to 15 billion euros, for regional governments who need to face pending payments to their service providers and finance debt servicing obligations. All money will go toward paying existing invoices.

Still, as occurred with banking loans and contracts, doubts emerge when reading the fine print, where there are conditions that awaken skepticism and hesitation among representatives from Spanish regional governments and PYMES, the main institutions affected by regional government administrations that are in danger of defaulting on debt and bills.

First of all, it is surprising that the Cabinet's decision to open a new line of credit does not appear in the Cabinet's official reports, although the measure has been widely commented on by Deputy Prime Minister Sáenz de Santamaria and Minister of the Economy Luis de Guindos. Also worth noting is the lack of transparency about what interest rates the credit will carry, which according to what Guindos said yesterday,  "will be more than 225 basis points in the first wave... and more than 175 basis points in the second."

If we use existing lines of credit that were extended to town councils as a gauge, then the interest rate would be 6.5%, a level qualified as "abusive" by Juan Zoido, president of the Spanish Federation of Municipalities and Provinces (FEMP following the Spanish abbreviation).

However, if using the ICO as a guage, the interest rate for 2012 would be variable and would apply the EURIBOR for six months more at 4%. If this interest rate is increased by the 225 and 175 basis points mentioned by Guindos, then we would be seeing rates ascend to 6.75%.