/ 20 April 2012

Profligate regions turn to Madrid

The Spanish government is expecting to take direct financial control of at least one of the country’s ailing regional governments by May, according to sources in Madrid.

With some regional debt already downgraded to junk, senior officials said it would be the regional governments themselves that would come to Madrid to beg for help to get through the year.

“It wouldn’t be surprising if this happened in May,” said a high-ranking official. “Some are paying interest rates that are impossible.”

International lenders are expected to welcome the plans after the warnings about the deteriorating state of the Spanish economy. Government borrowing costs jumped above 6% on Monday this week as foreign investors expressed growing fears over Mariano Rajoy’s administration and the prospect of a major default.

The rate, or yield, on the country’s 10-year government bonds hit 6.1%, the highest since December. Spain’s Ibex 35 share index fell to 7 245, down from February’s 2012 high of 8 902.

Lyn Graham-Taylor, a Rabobank strategist, said: “We’re back in full crisis mode. It is looking more and more likely that Spain is going to have some form of a bailout.”

Worries about Spanish bank loans to the beleaguered construction sector, bankrupt property developers and €50-billion of outstanding debts in Portugal have unnerved investors.

Markets are almost shut to some of Spain’s 17 regions, so their best hope of financing deficit spending and rolling over debt is Rajoy’s administration, which has passed tough new laws giving it the right to intervene in the regional governments.

Forced austerity
Government sources said the new law meant the regions, which controlled 37% of Spain’s public spending, could be forced to impose greater austerity to meet the deficit targets they missed so spectacularly in 2011.

The regions, which run health, education and other essential services, were largely responsible for Spain’s failure to bring its deficit under control last year, leaving investors and other eurozone countries worried that they had become untameable.

Rajoy may find himself in the politically embarrassing position of having to intervene in regions run by his own conservative People’s Party. The eastern Valencia region has had its debt downgraded to junk status and central Castile-La Mancha must find a way to cut its deficit from 7.3% of regional gross domestic product to the government’s 1.5% target this year.

Other potential targets include the country’s largest region, southern Andalusia, where the caretaker socialist administration was accused by officials in Madrid of hiding debt.

Local officials have vigorously denied the claim and invited European Union inspectors to scrutinise the accounts.

A new Andalusian government, led by the socialists and backed by the communist-led United Left Party, is expected to be formed soon following last month’s regional elections. Government sources said any attempt at rebellion by Andalusia against the strict 1.5% deficit target would be met with intervention.

Sources said the government was willing to share the political unpopularity of higher regional taxes or cuts in health and education.

During the next fortnight, the government will pass measures allowing the regions to adjust their spending, mainly with cuts, on health and education by €10-billion a year. Regional government budgets must be approved by next month.

Fellow eurozone countries have told Spain, which is now seen as the greatest threat to the common currency, to slash its deficit from 8.5% to 5.3% this year. Spain’s finance minister, Luis de Guindos, said this week that the country had entered recession in the first quarter. —