Moody's warns over Spanish regional debt

28th June 2011, Comments 0 comments

Moody's warned Tuesday it may downgrade Spain's powerful, spendthrift regional governments if they fail to curb spiralling deficits.

Spain's regional government debt, at about 121 billion euros, is a fierce concern to investors, who fear it could compromise the central government's goal to cut the overall public deficit.

Prime Minister Jose Luis Rodriguez Zapatero told parliament Tuesday he would propose next month budget limits on regions similar to a spending cap already in place for the central government.

"If Spanish regions do not take further steps to achieve sustainable improvements in their fiscal positions, their ratings will come under downward pressure," Moody's Investors Service said in a special report.

The New York-based credit rating agency said it expected several regional governments to exceed their 2011 targets of curbing the deficit to within 1.3 percent of economic output.

It cited overly optimistic revenue forecasts, difficulties controlling "rigid" spending on healthcare and education, and some regions' reluctance to cut spending ahead of May 2011 regional elections.

Unless regions take extra measures, the regional deficit will likely drift by 0.75 percentage points beyond the targetted deficit of 1.3 percent of economic output, it said.

At the same time, arrears in healthcare payments and liquidity tensions because of the high cost of borrowing money on nervous financial markets had led to a growing pile of unpaid bills in many regions, "which Moody's views as credit-negative," it said.

Moody's said regions rated" A" -- Castile-La Mancha, Catalonia, Murcia and Valencia -- missed their deficit targets last year and would face "significant difficulties" controlling deficits in 2011.

Others in the "Aa" category -- Andalucia, Castilla y Leon, Extremadura, Galicia, Madrid and the Basque country -- met or only narrowly missed deficit targets last year and were in a "reasonable" position to meet this year's targets, it said.

Nevertheless, even in this "Aa" group, some regions were expected to face tighter liquidity, adding pressure to their credit ratings, Moody's said.

Spain's central government cut the deficit to 9.24 percent of gross domestic product (GDP) in 2010 from 11.1 percent in 2009 but the regions meanwhile pushed up their deficit from 1.92 percent to 2.83 percent.

The government aims to trim the annual public deficit to 6.0 percent of GDP in 2011 en route to meeting a European Union-agreed deficit ceiling of 3.0 percent of GDP in 2013.

© 2011 AFP

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