“[Spain] can at any time restore control over its own destiny by leaving the euro. It comes down to cojones.” As some commentators would have it, the notion of solidarity in the euro zone has been all but wiped out after a long, arid credit crunch. But the recent announcement of the Spanish Treasury (general provision 12583) about regions being allowed to issue debt paper under the German law rather contradicts the picture of an imminent breakup.
Sub-sovereign administrations in Spain that need capital aid from the region's liquidity fund FLA will have the possibility of tapping a relatively small, public authorities-friendly German market in which Schuldschein are sold. Schuldschein are credit instruments with maturities ranging from two to 15 years, and a maximum volume of €500 million.
There is a lively secondary market for the Schuldschein, but it cannot be listed on stock exchanges. This offers protection from the savage volatility currently rampant in most European financial markets. And their shut doors. It used to happen that only Germany's local and autonomous administrations, banks and small and medium size business would issue this type of debt, but the gates were left ajar–particularly since 2008, according to law firm Norton Rose–for other entities like large corporates, some of them non-German companies like Iberdrola.
There are Spanish autonomous regions–Valencia, for instance–familiar with the Schuldschein since the 1990s. In most cases, Deutsche Bank was the intermediary.
The divide between core euro governments and a tumbling periphery has risen of late, to tell the truth. There exists fresh proof of it: Berlin recently sought the alliance of several northern European countries to counteract the European Central Bank's willingness to perform a lender-of-last-resort role.
But the fabric of Europe is already rolled out, with multiple correlations sparking as each country member takes a step to tackle its own recession.
Coming Schuldschein operations by Spanish regions should provide a template for new lending and borrowing patterns: one of cautiousness, transparency and mutual economic advantage. Europeans must assert to the rest of the markets that they know how to manage investment to spur sustainable growth, instead of reducing it to ashes into the bonfire of the vanities.
