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Spain regions shrink deficit in third quarter

Source: Reuters - Tue 29th Nov 2011

Spain's 17 autonomous regions posted a surprise slight surplus in their accounts in the third quarter, suggesting the country might buck expectations and meet its year-end deficit target.

The regions posted a 0.1% surplus of GDP in the third quarter, allowing them to shave their deficit to 1.19% in the first nine months of this year, compared with 1.21% in the first half, outgoing Economy Minister Elena Salgado said on Monday.

A Reuters poll of 12 economists last month had predicted the country would overshoot its target to cut the public deficit to 6% of GDP by the year-end from 9.3% in 2010.

The Bank of Spain and credit rating agencies have warned Spain's regions pose a risk to the country meeting its deficit target.

Although the government said Monday's regional deficit figure was not directly comparable to a full-year target of 1.3% for the regions, the latest snapshot of debt suggests local governments are tightening their belts.

"This data is hopeful," said Santiago Fernandez, economist at the Flores de Lemus Institute in Madrid.

"Now it seems much more possible for the deficit target to be met...although the large challenge of the last quarter of the year remains."

On Monday, the Organisation for Economic Co-operation and Development (OECD)'s November report also forecast Spain's public deficit this year would be 6.2% of GDP., better than the earlier Reuters poll consensus of 6.7%.

"This (regional) figure makes it believable the year-end public deficit won't be too far off the 6.0% forecast by the government," said Nicolas Lopez, analyst at M&G Valores brokerage in Madrid.

Spain's financing costs are at what many analysts consider unsustainable levels as markets continue to fret over the euro zone debt crisis and whether it will claim Spain and Italy as its next victims.

Spain's regions spent highly during the country's boom years, with income boosted by lucrative housing permits that dried up after the country's property bubble burst in 2008.

Spain's centre-right People's Party, which won a general election by a landslide on Nov. 20, has promised to meet ambitious deficit-cutting targets through an austerity regime.

Under Spanish law, the government will not be sworn in until about Dec. 20.

Although the incoming PP, led by Mariano Rajoy, has yet to outline its spending cuts, the party has introduced cuts in the regions, the majority of which it controls after the May local elections.

"The regions have contained their spending (in the third quarter)," Socialist Minister Salgado told a news conference.

"They should continue to make an effort for the rest of this year."

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