Spain will use its national lottery, the operator with the biggest jackpot in the world, to provide aid to regional governments as the nation struggles to avoid a second bailout itself.

The state-owned lottery will contribute 6 billion euros ($7.3 billion), taking out a loan against future revenue, to a fund of as much as 18 billion euros to fund redemptions and deficits for regions that request it.

Regions, many of which have been shut out of debt markets for more than a year, will pay a “small spread” above the central government’s yields to borrow from the fund, de Guindos said. The government will demand budget cuts in return from the regions that choose to use the fund, he said.

The yield on Spain’s 10-year benchmark bond rose four basis points to 6.68 percent as of 5:54 p.m. in Madrid, pushing the spread with similar German maturities to 5.42 percentage points.

Spain’s 10-year borrowing costs surged above 7 percent in June for the first time since the euro was created after the country requested as much as 100 billion euros in European loans to shore up a banking sector burdened with bad loans.

‘Fat One’

Loterias & Apuestas del Estado, a debt-free company the government tried to list on the stock market last year, has operated for almost 250 years in the world’s fourth-largest lottery market. The company’s annual Christmas draw, known as El Gordo, or the Fat One, had a prize pool last year of 2.3 billion euros. It had 2.6 billion euros of profit in 2010, according to the annual report.

The government also approved budget cuts announced by Prime Minister Mariano Rajoy on July 11, a reform of local government and measures to increase shop opening hours, lift restrictions on retailers to offer discounts and help exporters get financing.

Deputy Prime Minister Soraya Saenz de Santamaria said the government aims to increase competitiveness through some 20 laws scheduled for adoption in the second half of the year, including an energy-sector overhaul.

Budget Minister Cristobal Montoro confirmed changes in value-added tax rates, and announced most items in the reduced 10 percent rate category will be transferred to the general rate, itself increased to 21 percent from 18 percent.

“We had no choice,” Montoro told reporters. “We were forced by circumstances, by the recommendations, forced by the absolute priority to reduce the budget deficit.”

http://www.businessweek.com/news/2012-07-13/spain-s-national-lottery-to-help-bail-out-cash-starved-regions

Spain To Borrow from Lottery Firm to Aid Regions

Bailout fund for cash-strapped regions to total EUR18 billion

--Treasury to provide two thirds of fund

--National Lottery will provide the rest

MADRID--The Spanish government will take out a loan from its national lottery company to finance part of a newly- created fund to help Spanish regions pay debt maturities, Finance Minister Luis de Guindos said Friday, a move aimed at reducing the country's need to tap financial markets for expensive funding.

The regional fund will be run by the central government and will pay out a maximum of 18 billion euros ($22 billion) this year, Mr. De Guindos said at a press conference following the weekly Cabinet meeting. Spain will finance the fund by making Loterias y Apuestas del Estado SA, the most profitable of Spain's publicly-owned companies, take out a EUR6 billion loan, while the rest of the money will come from Spain's Treasury, he said.

The Treasury won't have to alter its issuance calendar as a result of the added financing needs, Mr. De Guindos added.

The fund is a response to repeated pleas for help from cash-strapped regional governments facing billions worth of maturities at a time when they are shut down from capital markets.

Its creation was announced late Thursday by Spain's Budget ministry, which said any region that taps the fund will have to accept extra cuts in spending, to help balance budget deficits.

The announcement came as the government approved a string of cost cutting measures, including an unpopular increase in the value added tax to 21% from 18% and the elimination of a traditional extra Christmas payment for public sector workers.

The increase in VAT will take effect on Sept. 1, Budget Minister Cristobal Montoro said at the same meeting.

Spain next week will issue short- and longer-term debt for the first time since the European Central Bank cut its policy rates, and borrowing costs are expected to remain elevated for the euro zone's fourth-largest economy.

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