Moody’s Investors Service cut the ratings of four Spanish regional administrations, including three of the most indebted, on concern that they will struggle to rein in deficits.
Moody’s cut Castilla-La Mancha to A2, Catalunya to A3, Murcia to A1 and Valencia to A2.
“Today’s downgrades reflect the wide deviations registered by these regions from the deficit limits set for 2010 and the subsequent difficulties Moody’s anticipates they will encounter in controlling their deficit and debt trajectories in 2011-12,” the ratings company said today in a statement from Madrid.
Spain’s regions control more than a third of public spending, including health and education, and hire half of all public workers. The government of Catalunya, the largest region and one of the most indebted, said after winning elections in November that its budget deficit would be larger than the previous administration had estimated, and the other three regions face elections in May.
“The experience we had with Catalunya shows that in elections, it’s hard to maintain strong fiscal discipline,” Sebastien Hay, senior credit officer at Moody’s, said by telephone. It’s not ideal timing to cut health and education spending.’’
The four regions missed their deficit goals in 2010, Finance Ministry data show, even as the central government’s stronger-than-forecast shortfall meant Spain ended the year within its overall budget target of 9.3 percent of GDP. The government in Madrid imposed wage cuts across the public sector last year, using one of the few tools at its disposal to control provincial spending. It also has to sign off on the regions’ debt-issuance plans.
“The key issue is how effective is the central government control of the regions,” said Hay, who forecasts gross funding requirements of 30 billion euros ($41 billion) to 32 billion euros this year. “The system we have right now has proved to be weak.”
Catalunya and Valencia are the most indebted of the 17 regions, measured as a proportion of their gross domestic product, according to the Bank of Spain. The 17 regions together have 108 billion euros of outstanding debt, or around 10 percent of national GDP.
Moody’s downgraded Spain’s sovereign rating one level yesterday to Aa2.