Spain's Valencia Struggles To Sell "Patriotic" Bond

Spain's Valencia region will likely fail to raise the full amount of a new EUR1.8 billion bond issue, a new sign of mounting stress for the regional governments that control one third of the country's spending in Spain, though Valencia officials said the region will be able to repay a bond that matures next week.

According to Spain's state-owned newswire EFE, Valencia President Alberto Fabra said Thursday his region will likely sell around 75%, or EUR1.35 billion, of the bond whose sale period ends Friday. A spokesman confirmed Fabra's comment.

Both the new bond and an existing EUR1.5 billion bond that matures Dec. 22 are short-term instruments sold to local retail investors with high interest rates. Spanish regions have increasingly resorted to this expensive financing tool, known as "patriotic bonds" in Spain, because international markets have been virtually closed to them since the start of the euro-zone debt crisis last year.

Spain has been especially hard hit by eroding investor confidence as global market turbulence intensified. The country, which has one of largest overall budget deficits in the euro zone, is suffering from the collapse of a tax-rich housing boom.

The failure of Valencia's new bond issue, which includes a one-year tranche offering a 5% interest rate and a two-year tranche offering 5.5%, would be the first of the so-called patriotic bonds.

In comparison, Spain's central government offered a 4% interest rate at a recent sale of one-year treasury bills.

The Valencia spokesman said that the regional government is in talks with the banks over other types of financing and there is no risk of it failing to repay the bond that matures Dec. 22.

The Mediterranean region of Valencia, with its hundreds of kilometers of beachfront properties, is ground zero of the collapse of the country's housing industry. After years of high spending, its government is one of the most indebted of Spain's 17 regions.

In another sign of mounting financial stress, neighboring Catalonia said Thursday that it will delay payments to suppliers as well as 20% of the annual extra payment given at Christmas to its employees.