Spanish Regions’ Budget Deficit Was Stable in Third Quarter

Spanish regions’ combined budget deficit for the year narrowed slightly in the third quarter as the euro area’s fourth-largest economy battled to bring down surging borrowing costs.

Deficit-cutting efforts in the three months to Sept. 30 enabled the 17 semi-autonomous regions to post a small surplus in the quarter and reduce the deficit accumulated since January to 1.19 percent of gross domestic product compared with 1.2 percent at the end of June, Finance Minister Elena Salgado told a news conference in Madrid today.

Spain’s borrowing costs are surging even after the People’s Party, which has pledged to erase the euro area’s third-largest deficit, beat the ruling Socialists in an election on Nov. 20. The PP’s deputy leader, Maria Dolores de Cospedal, said today it’s still hard to know if the nation can meet its 2011 deficit target as Prime Minister-elect Mariano Rajoy hasn’t yet had access to government data. The regions’ contribution to fiscal consolidation is crucial as they control more than a third of public spending and employ half the country’s public workers.

The regions have taken further measures since Sept. 30 to meet their deficit goal of 1.3 percent of gross domestic product, Salgado said.

Widest Shortfall

Castilla-La Mancha had the widest shortfall, at 4.84 percent of GDP, followed by Murcia, Valencia and Extremadura.

The methodology used for quarterly figures isn’t directly comparable with the data employed in the final calculation of Spain’s overall shortfall, including the central-government and social-security balances, and which the government hopes to cut to 6 percent of GDP this year from 9.3 percent in 2010.

The yield on Spain’s 10-year benchmark bond was at 6.572 percent today, below the euro-era high of 6.78 percent reached on Nov. 17. Spain paid more than Greece and Portugal to sell three-month bills on Nov. 22 and the gap between Spain’s two-and 10-year securities has more than halved in a month, echoing shifts that presaged bailouts in Greece and Portugal and suggesting skepticism about the PP’s ability to avoid contagion from Europe’s debt crisis.

Rajoy, whose government should be sworn in on Dec. 22 and who plans a first Cabinet meeting the following day, will hold a meeting on Dec. 1 with the heads of the 11 regions controlled by the PP to discuss the budget situation, Cospedal said.

Rajoy said on Oct. 24 it will be “very difficult” for Spain’s regional governments to reach their deficit goal this year.

Catalonian Plan

Cospedal declined to comment on fiscal consolidation plans announced on Nov. 22 by the government of Catalonia, Spain’s largest region with an economy the size of Portugal’s. The region, ruled by the CiU nationalist party, may cut public- sector wages and raise taxes and tariffs in 2012 as it tries to cut its budget gap, Spain’s third-largest at 3.86 percent of gross domestic product in 2010, to 2.66 percent this year and 1.3 percent next year.

Moody’s Investors Service said today the “rapid escalation” of Europe’s debt and banking crisis is threatening all of the region’s sovereign ratings. Standard & Poor’s, Fitch Ratings and Moody’s downgraded Spain’s rating in October, citing slippage in the regions as one of the reasons.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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