In the run-up to the European single currency there were expectations of major political changes that might take place after monetary union leading to more decentralized funding, with local authorities and regions issuing more and sovereigns less. Generally in the eurozone this change has been slow in coming. Spain is a key test case. Any significant increase in debt issuance by local authorities may hinge on political horse-trading between the central government and the "fast-track" autonomous regions.
The countdown has already begun for prime minister José María Aznar, who faces a general election next year. Since leading his centre-right Popular Party to a narrow victory over the socialists four years ago, Aznar has held on to his parliamentary majority thanks to an uneasy coalition struck with the powerful regional parties of Catalonia and the Basque Country. As the political scene begins to heat up this autumn, the two regional governments can be expected to put pressure on Aznar for the transfer of powers now held exclusively by Madrid, in particular the ability to raise their own taxes.
His view is borne out by Xavier Ruíz del Portal, the Catalan government's director-general for finance policy. "The Generalitat [regional government] aspires to obtain greater local powers, especially in fiscal and tax matters," he says. "We are now taking on responsibility for port management, traffic and the police force, but these alone will not increase our financing needs as they are covered by transfers agreed with Madrid." That's food for thought for prime minister Aznar, as he prepares to rally his troops ahead of the general election.
The Spanish Constitution, framed in 1978 after the death of the dictator Francisco Franco, set up 17 semi-autonomous regions (comunidades autónomas) with local powers in such areas as healthcare, education, housing and public works, although not all have taken on these responsibilities as yet. "Fast-track" regions such as the Basque Country and Catalonia took on healthcare and education, the two largest spending powers, at an early stage. The revenue side, specifically tax collection, remains squarely in the hands of the central government in so far as setting rates for major taxes is concerned. Madrid has attempted to accommodate demands for more tax autonomy by allowing the regional authorities to receive 30% of the income tax raised on their territories. "Over time the autonomous communities with a stronger tax base have been arguing for more tax autonomy and a greater participation in the tax raised on their regions," says Gabriele Baur, senior analyst at rating agency Moody's.
"Historically Spain has been one of the European pioneers in regional financing," says Inma Díaz, Morgan Stanley Dean Witter's coverage officer for Spain. "Most of the regions have ratings in the AA category and they have explored most markets and products with a view to improving costs and diversifying their investor base, for instance yankees, EMTN programmes and structured financing." It is in this latter area that Díaz sees the most opportunities for the future, by working with the companies that have been set up by some of the regional governments to finance infrastructure projects such as ports, schools, housing and transport. "We believe this is the area to be actively pursuing business," she says. "There are transactions involving the securitization of public housing belonging to the regional authorities, the financing of railway works, education and so on. If you want to truly advise the regions on financing you've got to include an array of instruments and not rely on plain-vanilla products."
The level of indebtedness of regional governments rose by almost 300% between 1990 and 1995, largely because of the transfer of responsibilities from Madrid to the regions and increased investment expenditure. These transfers have, in the case of the fast-track regions, largely been completed and the others have gradually been integrating their new powers.
"Only the larger regions are realistic candidates for capital market issues," says George Johnston, analyst at Barclays Capital. "Six authorities have public international bond issues outstanding and these regions will remain the most likely to come to the international capital markets in the near future." These are Catalonia, the Basque Country, Madrid, Valencia, Andalusia and Galicia. A limited number of regions have also issued in the domestic bond markets. Valencia, Catalonia and Andalucia have domestic bond auction programmes, although so far they have only limited liquidity.
The trend in recent years has been an increasing recourse to public debt markets. "Although the scale of the regions' borrowings is still small compared with that of the central government, it has been growing dramatically since the early 1990s," says Johnston. "In this period it has taken their outstanding debt levels from nil to about 11% of the general government total."
Regional debt issuance is not explicitly guaranteed by the central government but there is an unwritten commitment to keep the autonomous communities solvent. "The Basque Country is really the only region where their rating is constrained by the sovereign ceiling," says one analyst at ABN Amro.
The fact that Aragón (AA-) and Navarra (AA) have recently obtained ratings from Standard & Poor's may be an indication that they are thinking of issuing internationally.
Since last year Spanish regional governments have tapped the international markets to the tune of more than €2 billion ($2.16 billion). Most of these bonds were issued in euros. The regional governments of Andalusia, the Balearic Islands, Galicia and Navarra, and entities such as the University of Valencia, have issued in pesetas. Catalonia issued a $200 million, 20-year bond at 6.25% in the yankee bond market last December, with JP Morgan and Merrill Lynch as bookrunners. This was the region's second foray into the dollar market.
Catalonia has been by far the most aggressive player in the Eurobond market, with five issues since last year, and there is a strong likelihood that it will return to the international markets next year. "We have already fulfilled most of our financing needs for this year," says the Catalan government's Ruíz del Portal. "We have nothing in mind just now, as there are regional elections coming up in November. But we plan to do a roadshow this year to make contact with investors, probably in Italy, and we are looking at the possibility of issuing next year. We would like to do something in the dollar market.