Spain to allow regions to issue debt to refinance

9th February 2011, Comments 0 comments

Spain's regional governments will be allowed to issue new debt to refinance themselves as long as they comply with deficit reduction targets, Prime Minister Jose Luis Rodriguez Zapatero said Wednesday.

The 17 autonomous regions are at the heart of Zapatero's battle to convince bond markets that his government can bring its public finances under control and avoid following Greece and Ireland into a bailout from the EU and IMF.

Spain, which was formed out of a patchwork of warring kingdoms, has a highly decentralised system of government. The autonomous regions run schools and hospitals and account for about half of total public spending.

The central government set a limit for the public deficit of the regions of 1.3 percent of gross domestic product in 2011, down from 2.4 percent in 2010.

Zapatero said the regions which respect this limit, or that present the central government with a fiscal consolidation plan to ensure that they will, would be able to issue new debt that can only be used to pay redemptions.

The president of Catalonia, Artur Mas, said Monday after talks with Zapatero that he had received permission from the central government to issue bonds worth 2.5 billion euros ($3.4 billion) in the next few weeks.

The announcement prompted accusations from other regional governments that Madrid was favouring Catalonia, a charge Zapatero denied.

"There is nothing new in this," he told reporters as he entered parliament.

"All regions have to meet the deficit target. If they do not meet it, to be able to issue debt and refinance themselves they must present a fiscal consolidation plan, that was the case before, during and after the meeting with Mas."

Catalonia, with an economy the size of Portugal's, says the money from the bond issue is needed to cover an inherited shortfall after its 2010 deficit hit 3.6 percent of regional output.

Spain's 17 regional governments have a combined debt of around 105 billion euros.

The fiscal plight of the regional governments helps explain why Madrid estimates that the overall public sector deficit last year was only slightly below its target of 9.3 percent of national GDP even though it greatly exceeded its targets for cutting the central deficit.

Spain aims to cut the global public deficit to 6.0 percent of GDP this year and to below the 3.0-percent European Union limit by 2013.

© 2011 AFP

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