Spain Threatens Deficit-Troubled Regions, Offers Help

Spain’s government threatened regions that are having trouble meeting deficit goals while offering to help them regain access to bond markets at a time when the nation is trying to restore investor confidence.

Several Spanish regions risk missing their budget-deficit target of 1.5 percent of gross domestic product this year and have been given one week to take corrective measures, Budget Minister Cristobal Montoro said in Madrid late yesterday after a meeting with regional finance chiefs.

The Cabinet will examine today a mechanism to provide exceptional assistance with bond redemptions to regional governments that are shut out of markets, he said. The aid will be conditional on additional budget cuts.

The Cabinet is due to approve Spain’s fourth round of austerity in six months to comply with European Union demands and convince investors it won’t need a second bailout. The plan also aims to prevent regions from defaulting as the yield on Spain’s own 10-year debt hovers around7 percent.

Montoro rejected pleas from the finance chiefs to relax their deficit targets this year after the EU gave the nation leeway. Accepting only a 0.2 percentage point increase in next year’s goal to 0.7 percent of each region’s GDP, he toughened goals for 2014 and 2015.

Four of the 17 semi-autonomous regions voted against the targets while two abstained. “We have already made a huge effort and we wanted some respite before intensifying budget cuts,” Extremadura economy chief Antonio Fernandez told reporters.

Regions Involved

Montoro declined to identify the regions that risk overshooting this year’s goal or specify how many they are. Spain’s Cabinet may apply in one week the budget-stability law which enables the government to intervene in regions week, he said.

Eight regions may be involved, including Valencia and Catalonia, the newspaper Expansion reported, citing unidentified regional sources.

The government will create a state-guaranteed fund that regions can turn to in order to repay debt in exchange for further budget cuts, he said, without specifying whether the fund will issue debt or pool loans, following the model used to clear unpaid bills this year.

‘Flexible Instrument’

“What we will take to the Cabinet tomorrow is a financial instrument that can be diverse depending on the situation it has to deal with,” Montoro said. “It is a flexible instrument that will always impose conditions on the region using it.”

The mechanism turns its back on the joint debt sales announced by Economy Minister Luis de Guindos on March 27 backed by a guarantee from the national Treasury and aimed at reducing borrowing costs.

“This idea of hispabonds in the sense of mutualizing risk has never been on table,” Montoro said. The government will prevent regions from facing greater difficulties while making sure they assume their responsibilities, he said.

Montoro refused to provide any amount for the fund even as he said he didn’t expect big amounts.

Cash-strapped since a post-real estate boom recession shriveled tax receipts in 2008, the regions accounted for 69 percent of Spain’s overspending last year. They ran a deficit of 3.3 percent of GDP.

The government has requested them to cut the shortfall to 1.5 percent this year after keeping them afloat in the first half by bringing transfers forward and organizing 35 billion euros ($43 billion) in loans.

Regional Budgets

The aid balanced regional budgets in the first quarter at the central government’s expense, causing its deficit to swell to 3.41 percent of GDP in the first five months of the year, close to its own full-year goal.

Catalonia, Valencia and Andalusia, which account for 42 percent of the economy, are each rated junk or one notch from junk by at least one company.

Spain’s regions face about 15 billion euros of redemptions in the second half of the year, which will add to Spain’s swelling debt burden following the bailout of Bankia group, the country’s third-biggest lender.

“This proposal has more show than go,” said Michael Derks, chief strategist at FxPro Group Ltd. in London. “Spain isn’t in any position to take on more obligations and this isn’t going to repair the credibility of regional governments that have been shut out of markets for a considerable time.”

Prime Minister Mariano Rajoy said on July 11 the new deficit targets set by the EU for Spain this week take into account the country’s recession, its second since 2009.

Shared Target

The budget target shared by the state, the regions, the town halls and the social security was raised to 6.3 percent of GDP from 5.3 percent for 2012, 4.5 percent from 3 percent in 2013 and 2.8 percent from 2.2 percent in 2014.

Starting from July, regions will publish monthly budget data, instead of every quarter, according to a statement released by the Budget Ministry following the meeting. The government has also asked regions to provide budget plans for the next two years, in the same way Spain has been asked to provide them to the European Union, the ministry said in a statement.

(Curtsey : Bloomberg)

Rupesh Yatesh Dalal
Head Research Department

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