Spain Introduces Regional Debt Ceilings to Achieve Budget Goals

Budget Minister Cristobal Montoro
Budget Minister Cristobal Montoro said late yesterday, “We are all going to comply with deficit targets.” Photographer: Denis Doyle/Bloomberg

Spain’s 17 semi-autonomous regions will have to comply with debt ceilings starting this year as Prime Minister Mariano Rajoy seeks to convince investors the nation can avoid a second bailout amid surging borrowing costs.

“We are all going to comply with deficit targets,” Budget Minister Cristobal Montoro said late yesterday during a news conference following a meeting with regional finance chiefs in Madrid. Several regional representatives told reporters the new rules will force them to deepen budget cuts.

Rajoy is trying to avoid a broader bailout after securing 100 billion euros ($123 billion) in European loans for Spain’s banks. The yield on its 10-year debt rose to a euro-era high of 7.75 percent on July 25 even as Rajoy announced his fourth austerity package since Dec. 30.

It then fell after European Central Bank President Mario Draghi said last week he would do whatever is needed to protect the single currency, regaining 14 basis points yesterday to close at 6.75 percent.

Montoro said all but four regions voted in favor of the debt limits, which average 15.1 percent of gross domestic product this year and 16 percent next year. The regions together had a debt-to-GDP ratio of 13.1 percent and a deficit of 3.3 percent in 2011.

Catalan Boycott

Catalonia, the biggest contributor to Spain’s economy and its most indebted region, will have to keep its debt burden within a limit of 22.81 percent of GDP this year and 23.6 in 2013, said Antonio Beteta, deputy minister for public administration. That compares with 21 percent in the first quarter.

The region, ruled by a Catalan nationalist party, boycotted the meeting over Montoro’s refusal to relax the regions’ budget deficit targets this year. Asturias and the Canary Islands, also ruled by regional parties, turned up but voted against Montoro’s goals.

Beteta said the figures were calculated for each region using their 2011 debt load and adding a deficit of 1.5 percent of GDP for 2012 and 0.7 percent for next year.

Andalusia, the third contributor to GDP and the only region still in the hands of Spain’s Socialists, left the meeting early saying that the rules will force it to generate a surplus of 2 percent of its GDP next year. The rules would impose “indiscriminate and illogical cuts in services such as health care and education,” finance chief Carmen Martinez Aguayo said on her way out.

More Cuts

All of the regions ruled by Rajoy’s People’s Party, summoned to Madrid yesterday by the premier to hold talks ahead of the meeting, voted in favor. “The deficit and debt targets were shared out evenly,” Castilla y Leon finance chief Pilar del Olmo told reporters. She said the region will announce new budget cuts shortly to implement the rules.

The regions, which handle more than a third of public spending, were mainly responsible for Spain’s budget slippage last year. The country’s budget gap, the euro area’s third largest, remained almost unchanged from 2010 at 8.9 percent of gross domestic product last year.

Rajoy’s seven month-old government has bailed the regions out several times this year to prevent any default, transferring funds to them and organizing as much as 41 billion euros in bank loans to allow them to pay suppliers and redeem bonds.

The liquidity support burdened state finances, and data showed yesterday that the central government’s deficit surged to 4.04 percent of GDP, exceeding its full-year target. The nation, including all levels of government, has to comply with a 6.3 percent limit.

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