Bloomberg News

Spanish Regions Balance Budgets as Government Helps Funding

June 01, 2012

Spain’s regions balanced their budgets in the first quarter as the central government brought forward transfers to the cash-strapped states in exchange for budget cuts to tackle the euro area’s third-largest deficit.

“The regions are making a huge effort to reorder their finances,” Budget Minister Cristobal Montoro said after the weekly Cabinet meeting in Madrid. He said they are on track to shrink their deficit to 1.5 percent of gross domestic product this year from 3.3 percent in 2011.

Prime Minister Mariano Rajoy is trying to rescue the regions, which manage more than a third of public spending, without increasing the burden on the central government, as Spain’s own borrowing costs approach the 7 percent level that led Greece, Ireland and Portugal to seek bailouts.

The yield on Spain’s 10-year benchmark bond today was at 6.5 percent at 15:55 London time, compared with a euro-era record of 6.78 percent on Nov. 17. The spread with similar German maturities was 16 basis points lower than a euro-era record of 5.48 percentage points reached at 10:08 a.m.

Liquidity Transfers

The 17 regions eliminated their overall deficit in the first three months of 2012, compared with a gap of 0.75 percent a year earlier, the data showed. The shortfall would have been 0.45 percent had the government not anticipated transfers to provide them with liquidity.

Regions among those that overspent the most in December, such as Castilla-La Mancha and Catalonia, registered a surplus of respectively 0.59 percent and 0.45 percent, instead of deficits of 0.28 percent and 0.46 percent without the transfers. Andalusia had a deficit of 0.44 percent, instead of 0.6 percent, while Valencia’s accounts were balanced instead of a 0.7 percent shortfall.

The transfers, which amounted to 5.2 billions euros ($6.4 billion) in the first four months of the year, widened the central government’s budget gap in that period to 2.39 percent of GDP, it said on May 29. That compares with 1.57 percent a year ago and a goal of 3.5 percent for the full year.

The government is working on a plan to help regions return to capital markets, Montoro said. The mechanism, which will be “temporary” and linked to additional budget conditions, should be ready next week, he said.

Shut out of Markets

Regions will still be responsible for their debts and the government won’t create a separate institution to manage the project, he said.

Rajoy, in power since December, has pledged to help regions fund themselves. Three of the four top-contributors to the economy -- Catalonia, Valencia and Andalusia -- are shunned by investors while Madrid, among the best rated, paid 5.8 percent last time it publicly sold debt in March.

In exchange, the regions have committed to cut their deficit by more than half this year after they accounted for most of the nation’s budget slippage in 2011, when the shortfall reached 8.9 percent of GDP, compared with a target of 6 percent.

Montoro said the nation’s overall deficit goals of 5.3 percent in 2012 and 3 percent in 2013 are still valid. The government will draft its 2014 budget alongside the 2013 spending plan, Montoro said. The budget process starts around July each year and goes to parliament by the end of September.

To contact the reporter on this story: Angeline Benoit in Madrid at

To contact the editor responsible for this story: Craig Stirling at

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