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Spain Will Require Regions to Curb Deficits, Its Finance Minister Says
25 July 2011 @ 19:59

MADRID—Spain is preparing plans to force new budget controls on its powerful regions to ensure it meets its ambitious budget-deficit targets, Finance Minister Elena Salgado said.

In an interview late last week, Ms. Salgado struck a tough line with the regions that control one-third of spending in Spain. She said she wants regional finance chiefs to agree to new spending limits at a meeting Wednesday. Later, she said the government will draft legislation that would establish penalties for the regions that fail to meet their budget targets.

"The central government has approved a spending rule that links spending to [economic] growth," Ms. Salgado said. "We want the regions to do the same."

The measures respond to European Union demands to strengthen economic governance, especially in countries like Spain with large budget deficits. In a major step forward in resolving the European debt crisis, EU leaders agreed last Thursday to give new aid to Greece and to expand the scope of the region's bailout fund. They also called for a "rapid finalization" of an overhaul of the budget rules for member states that is expected to include automatic fines for countries that fail to meet EU-mandated deficit targets.

The EU deal helped improve investor sentiment toward fiscally frail countries like Spain and Italy, partially reversing the strong run-up in borrowing costs they had seen in recent weeks. Still, Spain has much to do to put its own house on order. Late Friday, the country's central bank took over Caja de Ahorros del Mediterraneo, of CAM, an important step in its efforts to clean up the ailing savings banks and one that had been long awaited since CAM asked the government for a €2.8 billion ($4.02 billion) cash injection earlier this year.

On the fiscal front, Spain's crisis has exposed deficient controls on the spending of the regions, which are responsible for essential services like health and education. Their budget overruns threaten to derail Spain's efforts to slash an overall budget deficit exceeding 9% of gross domestic product in 2010 to 3% in 2013.

Ms. Salgado will take the first step toward tightening control Wednesday by pushing the regions to adopt rules already embraced by central and municipal administrations that will cap spending at below the country's rate of economic growth. Then, in the coming months, Spain will tighten controls further with a new law. "If Spain is sanctioned [by the EU] because of the regions, we will pass these sanctions on to the regions," Ms. Salgado said.

Ms. Salgado's meeting with the country's 17 regional finance chiefs Wednesday will be the first since the Socialist party of Prime Minister José Luis Rodríguez Zapatero suffered historic losses in May regional and municipal elections. Most regions are now in the hands of the opposition Popular Party, and many of the new PP governments are expected to say they can't meet their 2011 targets of deficits equal to 1.3% of local GDP. "I will simply reiterate they have to meet their targets," she said.

Likewise, Ms. Salgado ruled out giving the regions—which are largely financed by taxes collected by the central government—any more money to ease severe liquidity pressures caused by declining revenue and central-government restrictions on debt issuance. "That would create moral hazard," she said. Many regions say they can't pay their suppliers, and some, like Castilla La Mancha, say they soon might not be able to pay their employees. Furthermore, they still have to refinance around €20 billion of debt this year.

In a report last week, ratings agency Standard & Poor's said it thought the central government would need to give the regions an additional €3.4 billion both this year and next. Ms. Salgado said all the ministry could do in an emergency is to advance some of the regions their monthly transfer payment. "We transfer money to the regions on a monthly basis, so we could, for example, transfer them the funds allocated for October in September."

Source: Bloomberg

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