21 January 2013

FT: Dispute threatens Spain's deficit target

A legal battle over a €1 billion privatisation in Catalonia is threatening to wreck the heavily-indebted Spanish region's budget plans, and risks forcing Spain to overshoot the 2012 deficit targets it agreed with the EU last year.

With Catalonia making up about a fifth of Spanish economic output, a miss for the region increases the chance of Spain itself overshooting a budget deficit target of 6.3 per cent of GDP agreed with Brussels for 2012. The Catalan government, which needs the proceeds of the €1 billion privatisation – worth 0.5 per cent of the region’s GDP – to meet a deficit target of 1.5 per cent for 2012, is now appealing against its own regulator to allow the contract to proceed.

Catalonia, which has an economy the size of Portugal’s and debts of €42 billion – the highest of Spain’s 17 regions – was last year forced to request an emergency €5 billion from the central government in Madrid at a time when the region’s leader, Artur Mas, launched triggered a snap election to win a mandate to push ahead with a referendum on independence from Spain.

The Spanish budget ministry, responsible for ensuring each of the country’s regional governments sticks to their deficit targets, said a successful legal challenge could result in the privatisation being disqualified from the Catalan accounts. The Spanish government itself pledged to reduce its deficit from nearly 9 per cent of GDP to 6.3 per cent for last year. Ahead of a final number being calculated by around late February or early March, it expects to miss this target, but achieve a deficit of below 7 per cent of GDP for the year.

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