Rajoy rides to the rescue of the regions

Those cash-strapped regional governments in Spain have been thrown a lifeline by PM Rajoy. The new Budget Minister, Montoro, has announced a package of measures for the regions, including a credit line and various other liquidity provisions, in exchange for a commitment to tighter centralised control over fiscal deficits. Montoro wants to impose spending and debt caps on each of the regions for this year.

In addition, the regions will be paid a transfer of EUR 8bln which was due six months ago. Suppliers of goods and services to these municipals have not been paid for months so this is welcome news, as is the announcement that regional governments will be able to apply for loans from the Official Credit Institute. In Spain, more than 30% of all government spending is undertaken by these regional governments. Also, regional governments have been given an extra five years to pay off the EUR 140bln of collective debt they owe to the central government.

Separately, Rajoy is also focusing closely on the parlous state of Spanish banks. In particular, he wants to force the banks to come clean on bad loans and to make more accurate provision for losses. He is working on a set of measures for the banking sector which he hopes will be ready by the middle of next month. Something obviously needs to be done – there was a huge drain of deposits from Spanish banks last year. For example, Banco Espanol de Credito SA, the retail arm of Banco Santander in Spain, recorded a decline in deposits last year of 15%.