16 April 2012

FT: Madrid threatens to intervene in regions

Madrid has threatened to seize budgetary control of wayward Spanish regions as early as May if they flout deficit limits, as investors took fright at the fragility of some eurozone economies.

Concerns about overspending by Spain’s 17 autonomous regions, and fears that its banks will need to be recapitalised with emergency European Union funds, undermined confidence in the country’s sovereign bonds, forcing down prices and pushing yields up above 6 per cent – towards levels considered unsustainable.

Spain’s total public sector deficit barely fell last year and amounted to some €90 billion or 8.5 per cent of gross domestic product, far above the 6 per cent target agreed by the former Socialist government with the European Union. Most of the overshoot came from the regions, which manage schools and hospitals, and account for just over half of all public spending.

Although Spain is one of the most decentralised nations in western Europe, Mr Rajoy’s ministers said they have the legal power to force autonomous regions into line, not least because they cannot raise money to fund their deficits without central government permission.

One possible candidate for intervention is Andalucia in the south, Spain’s most populous region, which has attacked Mr Rajoy’s austerity measures. Mr Rajoy’s Popular party had hoped to win a regional election last month and oust the leftwingers who have run Andalucia for 30 years but the PP did not get enough votes and the left remains in control. Andalucia, however, is not alone in failing to obey fiscal rules. All the major political parties, including the PP, have exceeded deficit targets in the regions they administer.

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