Spain regional credit crunch threatens austerity

 

If the autonomous communities -- as Spain's 17 self-governed regions are called -- let their budgets run out of control it will put the country's deficit reduction targets in doubt and weaken credibility with international investors.

The central government has sharply reduced funds to regional governments as it strives to reduce the national deficit by nearly two-thirds in four years. Squeezed regions and cities are putting off payments to hospitals and maintenance crews.

"They know the Spanish state is not going to allow them to go bust. That creates a moral hazard problem which ultimately presents a risk for the state," said Andres Rodriguez-Pose, economic geography professor at the London School of Economics.

With stubbornly high unemployment -- one in five is out of work -- and borrowing costs rising, Spain's government has sacrificed economic growth in favour of austerity measures to cut its deficit and reassure markets it can meet debt payments.

Meanwhile, the autonomous regions' combined debt has nearly doubled to 104.8 billion euros (91.9 billion pounds) -- 10 percent of gross domestic product -- over the past three years after a plunge in tax revenues since Spain's property bubble burst.

Central Bank Governor Miguel Angel Fernandez Ordonez said this week regional budgets are the biggest risk to the government's achieving its tough 2011 cost cuts.

"My impression right now is that measures taken by the majority of the autonomous regions do not meet the cut in public spending that is needed," Ordonez told lawmakers in a speech.

Under the rules of autonomy the central government has limited power over the regions to force them to cut spending.

Moreover, given the clout in the national congress of powerful regional political parties from Basque and Catalonian regions, the government could be backed into a corner.

Analysts said it is difficult to quantify a bail-out, but it would force the government to raise more funds or make even more spending cuts in its already painful budget, and its already downgraded credit ratings would come under scrutiny again.

REVENUE DRIES UP FOR TOWNS

Around the country, mayors are fretting over unpaid bills after splurging on subsidised nurseries and landscaping with the tax windfall in the decade-long construction-led economic boom before the 2007 property crash.

In the Catalonian town of Martorell, home to one of the country's biggest factories, the industrial complex of car maker SEAT, Mayor Salvador Esteve worries about his budget.

"Income has been slashed, but costs have not," he said, sitting at a desk in Martorell's handsome stone town hall. "The coming year will be harder still, and we will have to cut services and probably fire people who provide these services."

Similar stories are happening around Spain, where gardening and maintenance companies that tend parks are going into debt to pay workers' salaries.

"It's a disaster," says Javier Siguenza of the Spanish Association of Gardening Companies (ASEJA). "Eighty percent of a gardening company's costs is payroll. They are over their heads in debt, it's terrible."

Cities owe 300 million euros in unpaid bills for maintenance of their green spaces, ASEJA figures show. An average delay of 3 months in paying bills is now 8 months, Siguenza says.

If squeezed suppliers begin laying off workers it would exacerbate the unemployment rate -- already the euro zone's highest -- forcing the central government to step in and help out to avoid social unrest.

"If unpaid wages became a common problem across most of the regions then the government would have to step in," said Raj Badiani, analyst at IHS Global Insight.

CONUNDRUM FOR GOVERNMENT

Together, cities and autonomous communities account for 70 percent of central government spending. Under its austerity budget, Spain cut funding to the regions by nearly half to 28 billion euros.

Credit rating agency Fitch placed all its rated Spanish autonomous communities on negative outlook in August citing fragile current balances and danger of increasing debt.

The coastal region of Catalonia, home to Barcelona, runs the largest debt load of the regions with 29.5 billion euros of debt, which has more than doubled in three years.

Catalonia, which accounts for just under a fifth of Spanish gross domestic product, had to raise funds via an expensive syndicated loan earlier this year after it was shut out of bond markets, tainted by worries Spain's budget deficit could run out of control.

The region is now tapping bond markets again, but at a price, paying around 100 basis points on average more than the Spanish sovereign, according to one lead manager.

As Catalonia struggles to balance accounts, in the last three months payments to some hospitals have been delayed by around 15 days, said Ramon Cunillera of Catalonian hospital association CSC.

"It's now a conundrum for the government," said Rodriguez-Pose of the LSE. "The problem here is they have to face those payments and the only way they can face those payments is by going into greater debt."