10 January 2013

Bloomberg: Spain said to consider removing seniority of region rescue fund

The Spanish government may remove a clause from its bailout fund for cash-strapped regions that gives it first claim on their revenue, according to two people familiar with the matter.

The move is intended to placate creditors who have told officials that the introduction of the regional bailout fund in July 2012 changed the terms of their bond holdings and gave them the right to call in the debts, one of the people said. Legislation may be approved as early as this month to clarify seniority, said the two people who asked not to be named because the talks are private. With no changes, holders of around €118 billion of debt raised by the nine regions benefiting from the bailout fund would rank behind the Madrid-based Treasury for repayment. The backstop was extended to 2013 in December with a €23 billion budget, almost twice the amount used last year. The legislation being drafted would protect all regional creditors from subordination in the event of default and not only multilateral financial institutions as is currently the case

One-third of its planned €71 billion net debt issuance is earmarked for the bailout fund, known as the FLA. The Spanish regions had €167 billion of long-term debt in the first quarter, with €102 billion of bank loans and the remainder mostly bonds. The nine regions that rely on the FLA for funding including Catalonia, Andalucia, Valencia, Castilla-La Mancha, Murcia and the Canary and Balearic Islands, generate more than a half of Spain’s gross domestic product, according to the National Statics Institute data.

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