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Spain’s indebted regions feel the heat

Category : Business

Valencia became the first region to formally request a bailout, followed by Murcia – Catalonia, Andalucía, Castilla La Mancha and more are expected to join them

As markets seamlessly switch their attention from Spain’s banks to its regional governments this week, they are lurching between the country’s two biggest economic nightmares.

Spain rose above Italy in the ranking of eurozone anxiety earlier this year not just because its savings banks were awash in toxic real estate but because it spectacularly failed to meet its Brussels-set deficit target last year.

Instead of producing a deficit of 6% of GDP, it reduced its 2010 overspend by only fraction, to 8.9%.

The blame for this overshoot lay mostly on the shoulders of Spain’s seventeen semi-autonomous regional governments – which spend four out of every 10 euros of public money.

Last year there were elections in most regions, and many of the local governments spent with little thought for tomorrow.

Responsibility for delivering the welfare state lies firmly in their hands, and local politicians were not keen to cut education, health or social services as voters prepared to go to the polls.

But Spain’s housing bust, 24% unemployment and double-dip recession have also hit their income. Construction license fees and other tax income have also dwindled, making it even harder for them to pay bills.

Some have hiked their income tax, but much of the savings must come from painful spending cuts. Hospitals, schools and the elderly or disabled are all suffering as a result.

Two of the biggest overspenders were Castilla La Mancha and Valencia. The former produced a 7.3% deficit in 2011, while the latter increased its deficit from 3.6% to 4.5%.

Regional government debts are not especially high, but that makes little difference if the markets are closed to them when loans mature and must be refinanced. And they must also raise money to borrow for their deficits.

Several regions, including Valencia, have been given junk status by ratings agencies.

On Friday Valencia became the first region to formally request bailout money from a new €18bn (£14bn) government liquidity fund for regions, which will require it to present new budget adjustments. Murcia followed on Sunday. Catalonia, Andalucía, Castilla La Mancha and two or three more are expected to join them.

Tighter control of regional spending – and the threat of direct intervention if they cannot keep up interest payments to the liquidity fund – means a sudden end to the flow of power away from Madrid to the regions. Catalonia, especially, is upset. Regional president Artur Mas has threatened to call his own elections if the state takes direct control of the region’s accounts.

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