Moody's warns Spanish regions over retail bonds

MADRID: Spain's cash-strapped regions are damaging their credit standing by issuing bonds to the general public at rising interest rates, Moody's warned Monday.

The semi-autonous regions were issuing retail bonds at higher rates as they struggle to finance big deficits through more traditional means: bank loans, private placements or wholesale bond issues, it said.

The eastern region of Valencia said May 3 it would issue 900 million euros ($1.3 billion) in one-year and two-year retail bonds at a cost of about 6.5 percent including fees and commissions, New York-based Moody's said.

Valencia and Catalonia had already issued a total of nearly 8.0 billion euros in retail bond issues since November last year, equal to seven percent of the Spanish regions' total outstanding debt.

‘The recent increase in retail bond issuance is credit negative for regional governments in Spain,’ said a report by Moody's associate analyst Nicolas Fintzel.

‘It represents a sharp rise in the sector's financing costs necessitated by their difficulties financing large deficits.’

Valencia issued a 1.5-billion-euro retail bond in December. Catalonia issued 3.0 billion euros in retail bonds November last year and then closed another 3.3-billion-issue May 3.

Retail bond issues raise regional governments' financing costs, Moody's Investors Service said. More retail bonds with similar pay-outs would make it even harder to service their debts.

Also, it substantially increases their refinancing needs as all the issues are due for repayment in two years or less.

Moody's forecast Spanish regions' financing costs would be 30-35 billion euros this year, and probably in the same range in 2012 despite an expected lower deficit that year.

People were unlikely to replace their Spanish bank savings accounts with the retail bonds, it said, but the bonds could pressure banks to push up their rates of return and thus eat into their profits.

Spain's regional government debt, at about 105 million euros, is a major concern for the markets who fear it could compromise the central government's goal to cut its annual public deficit.

The Spanish government aims to reduce the public deficit to less than six percent of gross domestic product in 2011 before bringing it below the EU's three-percent ceiling in 2013.

While the central government managed to cut the deficit from 11.1 percent of GDP in 2009 to 9.24 percent in 2010, the regions pushed up their deficit from 1.92 percent to 2.83 percent in the same period.