The crisis in Spain is rapidly coming to a head. This crisis has nothing to do with Greek “contagion” as is widely believed. Spain dug this hole by itself. Spain’s immediate unsolvable problems are a bankrupt banking system coupled with bankrupt regions that have no way to pay bills. Spain’s regional governments need to roll €35.7 billion and there is current deficit of €15 billion.

The president of Spain’s Catalonia Region said it faces refinancing needs of €13 billion and is “running out of options refinance its debt”.

Catalonia accounts for about one fifth of the Spanish economy.

Moreover, Spain’s Valencia region set off alarm bells on a six-month €19 billion bond issue because it may be forced to pay a 7% return, more than two points above what Greece is paying for their junk bonds.

Regions Want “Open Bar” with Central Bank Guarantees

Let’s not mince words. Spanish regional governments are clearly and undeniably bankrupt. It should come as no surprise that the regional governments have asked the central government for “an open bar, meaning that the state allows the joint issuance of debt with the guarantee explicit regional treasury, and without demand conditions change, allowing them access to cheaper financing. The matter was discussed again at the Council of Fiscal and Financial Policy last Thursday.

The above story was pieced together with help of Google translate and the following articles:

The rescue of Catalonia and market nerves about Spain

In Guindos wants to keep money in advance to the CCAA

The problem for Spain is if it guarantees regional debt (the term used for this is “Hispabonos”) then the credit rating of Spain will drop and all of Spain’s borrowing costs will rise.

Bankruptcy, default, and an exit of the eurozone coupled with work-rule and pension reform is the only realistic solution.

Mike “Mish” Shedlock
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