Spain Faces Regional Resistance in Bid to Deepen Budget Cuts

Two Spanish regions shunned a meeting in Madrid called by Budget Minister Cristobal Montoro to discuss further fiscal cuts as efforts to prevent them defaulting widen the central government’s deficit.

Carmen Martinez Aguayo, the finance chief of Andalusia, the third-biggest contributor to Spain’s gross domestic product, walked out shortly after the meeting began at 5 p.m. in Madrid, while Catalonia, the biggest contributor, didn’t turn up. Both regions, the first ruled by the Socialists and the second by a Catalan nationalist party, oppose Montoro’s deficit and debt goals for the 17 semi-autonomous regional governments.

Montoro is seeking to impose more austerity on the regions after efforts to provide them, as well as cities and the welfare system, with liquidity burdened state finances. The government’s first-half deficit exceeded its full-year target, data showed today. There was no news yesterday from a separate gathering between Prime Minister Mariano Rajoy and regional executives from his People’s Party before the budget talks.

Rajoy is struggling to avoid a broader bailout after gaining the right to borrow as much as 100 billion euros ($123 billion) from European rescue funds for its banks. Its budget gap, the euro area’s third largest, remained almost unchanged from 2010 at 8.9 percent of gross domestic product last year.

Bond Yields

The yield on Spain’s 10-year bond was at 6.62 percent today, compared with a euro-era high of 7.75 percent on July 25 even as Rajoy announced his fourth round of austerity measures since Dec. 30. It fell after European Central Bank President Mario Draghi said last week he would do whatever is needed to protect the single currency.

The central government’s shortfall surged to 4.04 percent of gross domestic product in the first half of 2012 from 3.41 percent in the five months through May as it transferred funds to the rest of the public sector to prevent a liquidity squeeze, Deputy Budget Minister Marta Fernandez Curras said today in Madrid.

That compares with a central-government target for the year of 3.5 percent. Spain’s overall 2012 deficit goal, which includes all levels of government, is 6.3 percent.

Excluding 15 billion euros of transfers to regions, town halls, the social security system and the European Union, the central government’s gap through June was 2.56 percent of GDP, Curras said. The regions are set to present budget plans today as several show signs of deficit slippage, according to the ministry.

Budget Transfers

The regions, which account for more than one third of public spending, were mostly responsible for the 2011 slippage as they overshot their limit by more than 100 percent. This year, Rajoy’s seven-month-old government has organized as much as 41 billion euros in bank loans on top of budget transfers to allow them to pay suppliers and redeem bonds.

Still, Curras said Spain is on track to fulfill its commitments as an income-tax increase and corporate tax changes implemented this year are not yet having their full effect.

Curras said revenue from value-added tax will also improve, after falling 10 percent in the first half, as an increase announced in July will be implemented in September.

This year’s deficit targets for the central government, regions, town halls and social security remain unchanged at 3.5 percent, 1.5 percent of GDP, 0.3 percent and zero respectively, even after other euro-area countries agreed July 10 to raise Spain’s combined 2012 target to 6.3 percent from 5.3 percent.

The extra percentage point gives Spain room for maneuver to guarantee the overall target is met due to “uncertainty,” Curras said. In the first half, Spain’s interest costs to service its debt rose 32.6 percent from the first six months of 2011.

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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