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Debt-ridden regions weigh on Spain

Nov 28 2010 14:55 AFP

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Madrid - Spain's crisis-struck regions have rolled up a combined €105bn debt, heightening concerns about the prospects for the entire country's finances.

Senior members of Spain's Socialist government have stressed over past days that the Spanish economy is not the same as that of Ireland, which is being thrown a lifeline worth €85bn.

"Of course we are not the same," said the conservative daily ABC in an ironic commentary.

"Ireland has one state. One. Spain, 17. With all the insane multiplication of expenses that entails."

The 17 Spanish regions have considerable autonomy, with the right to issue bonds to finance their expenses.

They account for around one-third of general government expenditures - and just over half of the nation's total number of civil servants.

Now they are collapsing under a debt load of €105bn.

"When the economy stops growing, the regions, which finance their activities with taxes and VAT, see their revenues decline," said IESE Business School professor Javier Diaz Gimenez.

At the same time, their social expenses grow, for example to provide assistance to the ranks of unemployed, who account for 20% of the population of working age, he said.

In May, New York-based credit rating agency Standard and Poor's forecast that Spain's regions would register their worst budget performance in recent history in 2010.

Rival agency Moody's Investors Service downgraded its assessment of the creditworthiness of seven regions, including Madrid and Catalonia, and placed three more on watch for a possible downgrade.

The freedom extended to autonomous communities complicates central government efforts to trim the deficit.

"In a country as decentralised as Spain, where the regions have powers over spending but much less over receipts, it creates a very serious problem when the state decides to control costs," Gimenez said.

The Spanish executive wants the public deficit of the regions to decline from 1.92% of total economic output in 2009 to 2.4% in 2010 and 1.3% in 2011. By that time, Spain has promised Brussels it will have a global deficit of 6%, compared to 11.1% in 2009.

To tighten the screws on the regions, Finance Minister Elena Salgado called a meeting on Wednesday of policymakers of each region.

She showed the red card to Castile-La Mancha and Murcia: since they carried a "significant risk" of exceeding budget deficit limits in 2010 they were barred from issuing more debt before getting back on track.

In 2009, 14 regions failed to respect their deficit limits. Already, eight have forecast they will bust their budget limits in 2011, according a report in the El Pais daily.

Municipalities are suffering, too. Madrid, whose debt exceeds €7bn, tried in vain to negotiate with the central government. It has had to pass an austere budget in 2011 with no public works.

At the height of the property bubble things were good for the towns and cities, which dramatically boosted revenues by selling land and receiving taxes on sales and construction," said Madrid's Complutense University economist Carlos Sebastian.

"They thought they were rich and launched a lot of public works: indoor pools, sporting complexes," he said.

"When the construction cycle came to an end, the communes lost that source of revenue and had to go into debt," Gimenez said.

The result is was a growing pile of unpaid bills.

According to the Bank of Spain, the 8 000 communes have a cumulated debt of €13bn. Some contractors are threatening not to collect the rubbish or clean the roads.

"For the viability of those small businesses that supply the municipalities, it is very serious," Sebastian said. Since 2008, 200 000 independent workers and very small businesses have had to shut up shop.

ireland  |  spain  |  europe debt crisis
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