Spain crisis lender for regions can tap ECB to fill coffers

The Spanish government’s bank channeling aid to cash-strapped regions can keep a lid on its funding bill by tapping the European Central Bank for loans that cost it a fraction of the amount bond investors will charge.

While Instituto de Credito Oficial has sold 60 per cent of the euro 20 billion ($25 billion) in bonds it planned to issue in 2012, the lender is also able to use its banking license to access the ECB’s facilities, said Antonio Cordero, its head of funding and treasury. That allows the institution to access money at 1 percent, compared with a cost of more than five per cent from investors for its three-year debt.

 

“Like any other bank, the ICO can pledge loans as guarantees to obtain Bank of Spain funding,” Cordero said in a May 11 interview at the lender’s headquarters in Madrid. “Potentially most of our balance sheet is eligible.”

ICO, a government-owned development bank created in the 1970s, has become the main tool used by Prime Minister Mariano Rajoy to bolster regional finances as he struggles to meet Spain’s 2012 budget-deficit target. The institution’s access to the ECB shows the reach of emergency measures that pumped more than 1 trillion euros into the euro area’s banking system.

“We have euro 5 billion of prefunding from 2011, and we have a banking license and access to so-called non-conventional funding,” Cordero said. “As efficient managers we try to take advantage of the best opportunities markets offer.”

Collateral decision
ICO also stands to benefit from a decision by the ECB in February to widen the list of assets eligible for collateral by seven central banks including the Bank of Spain. Because of the wide use of the ECB’s loans by institutions around the euro region, there’s no longer any shame associated with using its emergency facilities, Cordero said.

“Maybe in the past certain operations had stigma attached to them,” he said. “In this case there is no more debate because it is clear there is absolutely no stigma, it is simply an opportunity one can take advantage of or not.”

ICO’s euro 3 billion of 3.75 per cent bonds due 2015 yield 5.2 per cent, according to Bloomberg Trader bid prices. That compares with a 1 percent rate the ECB applies to most of its loans including the 1 trillion euros of three-year financing provided in two rounds in December and February.

Spanish government bonds maturing 2015 yield 4.91 per cent, the highest since December, according to Bloomberg data. That compares with 0.13 per cent investors demand to buy German government bonds.

Breathing space
ICO’s continued access to funding enables it to provide breathing space for cash-squeezed regions and town halls after Europe’s debt crisis dried up access to bank loans and investors’ appetite for debt amid a slump in tax receipts.

By the end of June, ICO will have contributed about euro 7 billion in loans for administrations to pay unpaid bills to suppliers, and euro 5 billion for regional governments to meet bond redemptions, said Cordero.

That funding, promised by the government when it came to power, will be delivered this month and next only after applicant authorities present budget plans in compliance with the nation’s 2012 deficit goals. Rajoy has pledged to shrink the euro area’s third-largest budget deficit by 38 per cent this year as the economy endures a recession.

The 7 billion of loans for unpaid bills is part of a wider government program of syndicated bank loans totaling as much as euro 35 billion. That will help increase gross domestic product growth by 0.6 per cent this year and 0.6 per cent next year, said ICO chief economist Jose Abad.

“The impact of the program isn´t included in the government’s GDP expectations,” said Abad.