Andalusia Challenges Spain Debt Caps Meant to Deepen Budget Cuts

The third-largest contributor to Spain’s economy, Andalusia, will challenge in court the debt ceilings introduced by Prime Minister Mariano Rajoy to force the regions to deepen budget cuts.

“The debt limits transform our deficit target into a surplus obligation,” the southern region’s president, Jose Antonio Grinan, told a news conference in Sevilla today. “It is impossible to generate a surplus in times of recession, short of scrapping all public services including state-funded education and health care.”

Budget Minister Cristobal Montoro yesterday set debt limits for each region, averaging a combined 15.1 percent of gross domestic product this year, 16 percent in 2013, 15.9 percent in 2014 and 15.5 percent in 2015. That compares with a regional debt-to-GDP ratio of 13.5 percent in the first quarter.

Rajoy is forcing the 17 semi-autonomous regions to carry out the bulk of Spain’s 2012 budget-deficit reduction as he tries to avoid a second bailout. The country secured as much as 100 billion euros ($123 billion) in European loans in June to shore up its banks amid surging borrowing costs. Regional governments control more than a third of public spending, including health care and education.

Rajoy’s seven-month-old government has bailed out the regions four times this year, risking its own access to markets by transfering funds and organizing as much as 41 billion euros in bank loans.

Data yesterday showed the central-government deficit rose to 4.04 percent of GDP in the first half, exceeding its full-year target. The limit for all levels of Spanish administration is 6.3 percent, down from a shortfall of 8.9 percent last year.

Borrowing Costs

The yield on Spain’s 10-year benchmark bond fell 6 basis points to 6.69 percent today at 3:30 p.m. in Madrid on speculation the European Central Bank may intervene to lower Spanish borrowing costs. The yield hit a euro-era high of 7.75 percent on July 25.

Grinan, in charge of the only Socialist region left in Spain, said Andalusia will have to reduce debt by 2.74 billion euros next year to comply with a ratio of 13.2 percent of GDP. Its plan was to let debt climb to 15.1 percent of GDP from 10.6 percent in the first quarter.

“We are taking resources away from health care and education to save the banks, that is intolerable,” Grinan said.

He said that regions with lighter debt burdens should not be asked to make the same effort as others. Catalonia, the most indebted region, should do more than cap its debt at 23.6 percent of GDP next year, he said.

Catalonia, the biggest regional economy, boycotted yesterday’s meeting with Montoro, while two other regions also ruled by regional parties, Asturias and the Canary Islands, voted against the rules.

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