Spain struggles to meet regions' 36 billion-euro debts

Top Spanish officials are at odds over how to help the country's highly indebted regions refinance 36 billion euros of debt this year, government sources told Reuters on Wednesday.

The figure, revealed in the budget plans from 17 autonomous communities, compares with previous public data of around 8 billion euros of bonds maturing in 2012.

The difference is due to bilateral loans from Spanish banks to the regions worth 28 billion euros that were not made public previously. It could unnerve further investors concerned by the capacity of Spain to curb its public finances and reform its banking sector.

Spain's weak banks and overspending regions are at the heart of the euro zone debt crisis. There are fears that expensive bail-outs of ailing lenders, like fourth largest lender Bankia, could force the country to seek international aid.

Many of the autonomous regions are virtually blocked from financing themselves on public debt markets due to the high rates they would have to pay. Some have seen the credit rating on their debt cut to junk status.

Spain's government last week admitted its 2011 public deficit was higher than it had previously reported after three regions adjusted accounts.

The government sources said the central administration now aimed to put forward a new mechanism to back regions' debt as soon as early June.

But, the sources said, Economy Minister Luis de Guindos and Treasury Minister Cristobal Montoro disagreed on the final form the new instrument should take.

De Guindos favours a centralised mechanism which would control and issue debt for the regions. Montoro would rather see a less intrusive instrument which would fall under the umbrella of his ministry, possibly based on credit lines from the central government to regions which meet their deficit targets.

"Montoro is the one who has to deal with the regions and make sure that they meet their deficit targets. You can't tell them on one side that they have to be austere and on the other side give them unlimited liquidity," one of the sources said.

Catalonia and Valencia

After weeks of negotiations, Montoro last Thursday gave his blessing to spending cuts plans presented by all 17 regions except for the small northwestern one of Asturias, which will have to present a new budget within 15 days.

The regions account for around 50 percent of the country's overall public spending and are responsible for their healthcare and education budgets, where cuts are likely to fall.

The central government has authorised them a deficit of 15 billion euros this year, bringing their funding needs to 50 billion euros overall.

Their commitment to savings costs this year will be key to helping the country try to meet an ambitious target of slashing the public deficit to 5.3 percent of gross domestic product this year from 8.9 percent in 2011.

The situation is however especially difficult in Spain's two most indebted regions, Catalonia and Valencia, which account for about 60 percent of all regional debt maturing this year, the data released by the regions show.

Both autonomous communities needed to refinance more than 10 billion euros this quarter and more than 8 billion euros in the second half of the year.

Earlier this month, Valencia had to pay a very high price of 7 percent to refinance 500 million euros of debt with a six-month maturity, fuelling concerns internationally about the sustainability of the country's finances.

The risk premium investors demand to hold Spanish over German debt remained steady at around 484 basis points on Wednesday after reaching last week record highs at over 500 basis points.