Spanish PM warns regions to slash spending

Spain’s prime minister has warned autonomous regions to curb public spending or face a government crackdown, in an interview with the Financial Times published Monday.

“At the end of the day, who is accountable, who is responsible?” Jose Luis Rodriguez Zapatero told the FT.

“It’s the central government, isn’t it? And we have to spearhead, lead the way forward with the control of public spending for the autonomous regions. And they have to deliver. They have to fulfil those obligations because if they don’t, the government will act.”

Spain’s 17 regions have considerable autonomy, with the right to issue bonds to finance their expenses.

They account for around one-third of general government expenditures — and just over half of the nation’s total number of civil servants. But the freedom extended to autonomous regions complicates central government efforts to trim the deficit.

Spain’s crisis-struck regions have rolled up a combined 105-billion-euro (140-billion-dollar) debt, heightening concerns about the prospects for the entire country’s finances.

Last May, the New York-based credit rating agency Standard and Poor’s forecast that Spain’s regions would register their worst budget performance in recent history in 2010.

Zapatero warned that the government was prepared to act against any region that stepped out of line.

“We have powerful instruments,” he told the FT. “No autonomous regional government could actually issue debt without the backing, without the authority of the central government. So we hold the key.”

The government has pushed through unpopular austerity measures, including higher sales taxes and cuts to public workers’ wages, to slash a public deficit that hit 11.1 percent of economic output in 2009, the third-highest in the eurozone after Greece and Ireland.

Zapatero vowed last week to meet his goals of cutting the to 2009 to 9.3 percent in 2010 and 6.0 percent in 2011. The EU deficit limit is 3.0 percent.

The country received some relief on Thursday with a successful auction of 10-year bonds.

But the sale represents only a small proportion of the country’s financing needs for this year.

Spain’s central and regional governments and its banks combined need to raise about 290 billion euros in gross debt including rollovers in 2011, according to Moody’s Investors Service.

The Spanish economy, the EU’s fifth biggest, slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of the once-booming construction sector.

It emerged with tepid growth of just 0.1 percent in the first quarter of 2010 and 0.2 percent in the second but then stalled with zero growth in the third.

Spain is now battling speculation on world markets that it may be forced to follow in the footsteps of Greece and Ireland and seek a bailout from the EU and the International Monetary Fund.

A rescue for Spain would be far bigger than anything seen to date in Europe: its economy is twice the combined size of Greece, Ireland and Portugal, which markets fear also may need aid.

In the first part of the FT interview, published Saturday, Zapatero said he backs a second round of restructuring of the country’s regional saving banks.

“We are reforming our financial sector and it is the most ambitious, far-reaching reform of that industry over the last 20 years in Spain,” he said.

“We have to finish off the restructuring process … so that there will not be the shadow of a doubt over the sovereign creditworthiness in the system,” he said.

Thirty-nine regional banks, from a total of 45, are now in the process of merging or forging operating alliances.

All eight major Spanish banks passed the EU’s bank stress tests on their ability to weather a crisis although five out of 19 regional lenders failed.