Unpaid local government bills yet another way bank bailouts hurt real economy

The Wall Street Journal ran an article describing how local governments in Spain and the rest of the eurozone peripheral countries have been delaying paying their bills and the negative ripple effects that these delays are causing for the real economy.

The reason why the local governments are delaying making payments is a combination of lower tax revenue and limited access to financial markets to borrow money.

Bailouts of the banks factor into this delay in making payments as money that is raised by a sovereign with limited borrowing capacity and used to bailout the banks is unavailable to be used to support local governments and help these governments to stay current on their bills.

While delaying paying their bills effectively gives the local governments a zero interest rate loan, the cost of this loan is absorbed by the firms that provide services to the local governments.  This cost reduces their earnings and hence the capital they have available for reinvestment, growth and hiring.

Nuria Jarque's company has maintained water-treatment plants in Spain for 25 years, but lately she is being forced to act like a lender of last resort. 

Local governments across the country, facing a steep drop in revenue and largely unable to borrow from banks or financial markets, have been paying Ms. Jarque and other suppliers of goods and services months behind schedule. 

Ms. Jarque says the delays amount to interest-free loans to fund government operations, and are pushing her company to the brink of bankruptcy. 

Thousands of companies are shouldering similar burdens as the financial woes of Spanish government bodies ripple across an economy amid its second recession in three years. 

By the end of October, regional governments had accumulated bills in 2012 for providers, interest payments and other obligations totaling €13.7 billion ($18.1 billion), more than 1% of Spain's gross domestic product, a government report found.

Suppliers are depleting their cash reserves, forgoing investments and postponing payments to their own providers. Many have dismissed workers, pushing up a national unemployment rate that exceeds 25%. A growing number are filing for bankruptcy—27% more through September of this year than in the same period in 2011, according to Spain's judiciary....

This is a direct consequence of the choice to bailout the banks rather than to focus resources on protecting the real economy and the Spanish citizens.

"Money is really, really tight, and the suppliers are having to bear it," said Ángel Saz Carranza, professor at ESADE Business School in Barcelona. "It is putting a further brake on economic activity." 

The central government has moved to cover some of the debts of local administrations, raising pressure on Spanish Prime Minister Mariano Rajoy to seek financial help from the European Union—a politically risky step. 

Overdue payments have long been a bigger problem in southern Europe than in the north. 

The debt crisis that has restricted lending to peripheral euro-zone governments is aggravating the problem, which is rising in Greece and Italy as well. 

Spain's crisis, set off by the collapse of a real estate boom nearly five years ago, is particularly acute in areas where declining revenue from real estate taxes pummeled municipal and regional finances.