Tighter Debt Reduction Targets for Spanish Regions Seen as Ambitious

Fitch Ratings said that the Spanish central government demonstrated its intent to control regional government spending at last week’s joint council meeting, most importantly by imposing stricter deficit targets on the regions for 2013 and 2014. The Ministry of Finance (MoF) will schedule regular meetings with the regions to help them achieve these goals.

The credit ratings agency (CRA) reports that the region’s deficit targets were changed to 0.7% and 0.1% for 2013 and 2014 respectively, from 1.1% and 1% previously, at the Consejo de Politica Fiscal y Financiera (CPFF) meeting on 12 July. The stricter targets equate to a further €4.2bn adjustment for 2013. The CPFF meeting includes a representative from each of the 17 regions and 17 members of the central government.

Fitch said that the new targets appear very ambitious considering the 2010 and 2011 results and the ongoing economic environment. The central government has not yet announced the reason for such a change in the deficit targets. The CRA doubts whether the regions will be able to meet this target without further cuts in spending, even though they will benefit from greater revenue from the government’s recently announced hike in the sales tax, although this is unlikely to be felt until 2014. The regions receive 58% of the proceeds from the sales tax.

The new stability law, which has been in force since April, allows the central government to intervene if it does not believe a particular region is going to meet the agreed targets. Fitch said that the central government’s hunger to keep the deficit programme on track is clearly shown by the announcement at the CPFF meeting that the autonomous regions will now inform the central government on a monthly basis about their budgetary position, and that the central government will schedule regular meetings to assess any potential for slippage.

The MoF also indicated that a fund would be available to provide liquidity to the autonomous regions. The CRA said that this is a positive credit element for the regions, although the details included in the conditions of eligibility are still missing, as it can reduce funding costs and further indicates central government’s support. Fitch considers the conditionality of the programme to be positive, as it will align the central and regional governments in their commitment to reach the targets.


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