MINISTRY OF ECONOMY AND COMPETITIVENESS
13-VII-2012
THE NEW REGIONAL LIQUIDITY MECHANISM
Faced Faced with the funding difficulties experienced by Spanish Autonomous Communities in the last months, the Central Government has designed a scheme to enable the centralisation of public debt issuance in Spain, to provide liquidity to Autonomous Regions, and to ensure their financial sustainability with significant reductions in their costs. This mechanism is grounded on strengthened fiscal conditionality and supervision through continuous monitoring of the adjustment plan of each beneficiary region, ensuring the achievement of the General Government’s budget deficit targets.
The mechanism is based on the following principles:
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Participation will be voluntary. Those regions that wish to participate in 2012 must make a request to the Central Government before December 31st. Beyond 2012, Autonomous Regions that wish to participate will have to report their funding needs to the Central Government before September 30th of the previous year.
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The Central Government will add the funding needs of participating regions to its funding programme. The priority of the Treasury will be to cover Autonomous Region’s Redemptions in capital markets.
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The Central Government will borrow the funds and put them at the participating regions’ disposal through a loan agreement. This loan will be backed by the participating Autonomous Region’s resources in their regional financing system (participation in centrally collected tax revenues).
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Participating Autonomous Communities will be subject to strict fiscal and financial conditionality based on the approval and monitoring of an updated adjustment plan. Information requirements will increase, and the procedures stipulated in the new Organic Law for Budget Stability and Financial Sustainability will be fast-tracked if deviations from these adjustment plans are detected.
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The mechanism will apply the principle of financial prudence for participating regions, to prevent them from incurring in debt that may jeopardise their own and the system’s sustainability.
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Autonomous Regions that decide not to take part because they retain capital market access will nonetheless be subjected to strict supervision of their budget execution.
This mechanism will be implemented through a FUND, funded by the Treasury, monitored by the Ministry of Finance and managed by ICO. Disbursements will materialize in line with capital market redemptions and duly audited cash requirements by the regions.
ESTIMATES OF FUNDING NEEDS
Considering that the ICO-CCAA 2012 credit line has already covered several regions’ redemptions up to July, and that the Spanish financial system will maintain its current credit exposure to Autonomous Communities, the liquidity mechanism will need to fund 18 billion euros.
This net funding figure has been estimated by analysing regions’ cash flow forecasts up to the end of 2012, and is based on the forecasted maximum cash deficit for the rest of the year, considering that part of this cash deficit has already been financed in the first half of 2012.
FUNDING THE MECHANISM
These funding needs will be covered with the following resources: o
An extraordinary dividend payment to the Treasury by Loterías y Apuestas del Estado for 6 billion euros.
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The Kingdom of Spain will cover the remaining liquidity needs, its first priority being capital market redemptions.
The inclusion of the liquidity mechanism’s funding needs will not alter the Kingdom of Spain’s funding programme for the rest of the year.
FISCAL AND FINANCIAL CONDITIONALITY
Participating Autonomous Regions will be subject to strict fiscal and financial monitoring to avoid any potential deviations from budgetary deficit targets and to prevent any financial operations that may jeopardise their own and the system’s sustainability. 1. Fiscal Conditionality: a) Updated Rebalancing Plans with additional information on the cash balance of each Autonomous Region b) The Rebalancing plans must be approved by the Government c) Monthly budgetary execution reporting and assessment on the implementation of the Rebalancing Plan d) Additional control by State Auditor’s Office e) Potential direct intervention of the budget accounts in case of risk of deviation from Rebalancing Plans (Art. 26 of Budget Stability Law) 2. Financial Conditionality: a) Restrictive Financial conditions for the beneficiary Autonomous Region, for new financing operations outside the mechanism (short-term loans) b) All new debt authorisations require Treasury’s approval c) Only current deficit needs in line with target will be funded