Spain Unpaid Bills May Haunt Rajoy as States Crave Liquidity

Spain’s 8,000 municipalities and 17 semi-autonomous regions are suffering from a cash squeeze as many are shut out of markets, prompting them to delay paying suppliers. Regions’ debt rose 1.5 percent to 135 billion euros ($176 billion) in the third quarter the Bank of Spain said today. Catalonia had the highest debt, at 39.3 billion euros.

Companies are being paid 157 days late on average, about three times the legal payment delay, according to the Platform Against Late Payment, a federation of employer groups, and pharmaceutical companies say they are owed 5.83 billion euros by public hospitals. While Rajoy has pledged to help local administrations pay suppliers, that may add to the state’s debt burden and undermine efforts to lower sovereign borrowing costs.

“Rising commercial debt means there is more deficit and that the risk of missing deficit targets increases,” said Marisol Blazquez, an analyst at the ratings company Moody’s Investors Service in Madrid. “Apart from the Basque country, the Madrid region and Galicia, all the regions we rate are having liquidity issues.”

The yield on Spain’s 10-year bonds eased to 5.108 percent as of 1:20 p.m. in Madrid from 5.433 percent yesterday. It rose to a euro-era record of 6.78 percent on Nov. 17.

Markets Limited

The outgoing government will make its regular transfer to the regions three days early this month to ease liquidity tensions, Finance Minister Elena Salgado told reporters yesterday, and the government said today it will also bring forward the regular transfer to town halls.

Valencia only managed to sell 75 percent of the bonds it offered to its citizens in a sale due to close today, state newswire Efe reported, and Catalonia may ask the government for an extraordinary loan, Barcelona-based La Vanguardia said.

The regions’ debt load increased to 135 billion euros in the third quarter from 133 billion in the previous quarter. That’s the smallest increase since the third quarter of 2008.

“This confirms our perception that markets are limited to all but Treasury debt,” Jose Luis Martinez, a strategist at Citigroup Inc. in Madrid, said in a telephone interview.

Payment Delay

Rajoy’s People’s Party takes over on Dec. 21 after winning a national election last month. Companies from multinational pharmaceutical laboratories to one-person cleaning firms will press the new government for a solution to the mounting bills. Unesa, which represents Iberdrola SA (IBE), Endesa SA (ELE), Germany’s E.ON AG, Gas Natural SDG SA (GAS) and HC Energia, says town halls owe the five power companies about 500 million euros.

Ana Bujaldon, the chairwoman of the Spanish women executives’ group Fedepe, said the delays are “unbalancing companies’ accounts” and some firms have had to freeze wages as they await payments. Farmaindustria, the association of health companies, said its members are waiting more than a year on average to get paid and has proposed securitizing the debt in a state-backed program.

Spain’s 23 percent unemployment rate, the highest in the European Union, and weak consumer spending led to the economy stalling in the third quarter. The slowdown is curbing tax revenue, while tightening market conditions mean the regions are facing tougher funding options.

They have also fallen behind schedule on spending cuts that are crucial to Spain’s efforts to lower its budget gap. Rajoy has pledged to impose stricter fiscal rules on their administrations.

‘Mounting Payables’

“Mounting payables are a consequence of running deficits and difficult access to financial markets,” said Lorenzo Pareja, a credit analyst for Spain at Standard & Poor’s in Milan. “Capital markets are no longer a reliable source of funding even for regions such as Valencia or Catalonia which have a long track record of issuing bonds.”

Luis de Guindos, a former deputy economy minister and a possible candidate for finance minister, has said the government may be able to use the situation to extract deeper cuts from the regions in return for liquidity support.

“There’s a unique opportunity to sort out the finances of the territorial administrations,” Guindos, director of the PwC and IE Business School Center for Finance in Madrid, said before the election. Delays are “financially suffocating” companies.

‘Liquidity Tensions’

There is no centralized data for the total amount of bills unpaid by all Spanish administrations. The figures are included in Spain’s quarterly budget data and don’t constitute a “hidden debt,” said a spokesman for the finance ministry, who declined to be named in line with policy.

Fitch Ratings said Dec. 2 there are “clear liquidity tensions” in the regions. They “are funding themselves by extending the payment period,” it said, noting that Castilla-La Mancha and Murcia are settling only 73 percent and 78 percent of recognized current expenditure respectively.

In its electoral pledge, the PP promised a credit line with the state-run Official Credit Institute to help municipalities pay small companies. The Platform Against Late Payment estimates a 30 billion-euro credit line would resolve the liquidity crunch in two or three years.

Unpaid bills are “a negative signal to the markets,” said Fadi Zaher, a fixed-income strategist at Barclays Wealth in London. “The bottom line is there has to be a push at the state level to support regions.”




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