Spain’s new central government may just have played a pivotal role in securing a new round of funding for its most heavily indebted autonomous community in a tacit agreement to support the community’s debts, according to government sources cited by Spanish newspaper El Pais.While admitting that the Public Treasury had met with the Valencian municipal government to discuss its liquidity problem, economy minister Enrique Verdeguer denied rumours that the Public Treasury had guaranteed the region’s debt payments, saying that the payment was made through typical collaboration between the community government, the Treasury, and the Official Institute of Credit (ICO).
According to the report, the Treasury may have assured that the Valencian government receive a loan to finance a payment of €123 million ($160 million) in maturing debt held by Deutsche Bank, funding the community no longer was able to come up with independently. If this is true, it could amount to the first implicit “bailout” that the government has undertaken to support its borderline insolvent municipalities.
From the report (Spanish), an official from the Council of the Economy for the government of Valencia responded to questions yesterday:
“It’s paid.” But has it been guaranteed by the Public Treasury? “In this case, yes.”
Regardless, the “bailout” would not be without its nuances. Spanish law prevents the Treasury from explicitly guaranteeing communities’ debt payments. Sources in the government said that the National Treasury had never officially agreed to guarantee Valencia’s debt.
Municipal officials also played down the importance of the development. Jose Ciscar, the vice president of the Valencian government, told reporters, “This is nothing extraordinary,” saying that the debt was paid using Valencia’s “own resources in addition to other financial mechanisms.” He added, “There’s no cause for alarm.”
Spain’s communities have been at the centre of the country’s debt problems recently. Excessive spending during an economic boom a few years ago ultimately resulted in mismanaged finances, jeopardizing the communities’ ability to pay off debts now.