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January 31, 2011 10:57 pm
Catalonia, one of the richest parts of Spain, needs to raise €10bn-€11bn in debt this year to cover deficits and repay earlier loans, in a regional credit crunch that threatens to undermine efforts by Spain and the eurozone to resolve the broader sovereign debt crisis.
Andreu Mas-Colell, finance minister in the newly elected Catalan nationalist government, conceded in an interview with the Financial Times that it was “not a negligible amount”, as he added up the numbers and explained how he had inherited unfunded deficits from the previous, Socialist-led regional government.
“We’re not yet guilty of anything,” he said, in an echo of the outraged complaints of Greek ministers in 2009 when they inherited a deficit from their predecessors in power that was much worse than previously announced.
Spain’s 17 autonomous regions have become the new front line in the battle by José Luis Rodríguez Zapatero, the Socialist prime minister, to convince bond market investors that his government can implement its austerity programme and bring its public finances under control – and thus avoid following Greece and Ireland into a bail-out funded by the European Union and the International Monetary Fund.
Mr Mas-Colell said Catalonia – with an economy the size of Portugal’s – needed money to cover an inherited shortfall after its 2010 deficit hit 3.6 per cent of regional output, 50 per cent above Madrid’s limit for the regions in that year.
Cash-starved Catalonia, like many Spanish regions and municipalities, has repeatedly delayed payments to suppliers, including pharmaceutical companies, and is estimated to have built up about €3bn ($4bn) in arrears. The projected Catalan deficit for 2011 will require a further €2.6bn, while €5bn-€6bn of existing Catalan debt matures this year, including €3bn of one-year bonds sold in desperation to Catalan residents at the end of last year by the previous government.
Catalonia’s financial plight helps explain why Spain calculates last year’s overall public sector deficit at 9.2 per cent of national GDP, only marginally better than the original plan, even after it greatly exceeded its targets for cutting the central deficit.
Mr Zapatero has pledged to cut the overall public deficit, which peaked at 11.1 per cent of GDP in 2009, to 6 per cent this year. But he has only in the past few months begun to heed warnings by economists that growing regional and municipal debt was weakening the credibility of his austerity plans in international markets.
The autonomous regions, which run schools and hospitals and account for about half of total public spending, have more than €107bn of debt. About a third of that is Catalonia’s. The total public sector debt exceeds €560bn.
Mr Zapatero and Elena Salgado, finance minister, have now imposed strict limits on regional deficits, as well as accelerating other economic and financial reforms, including the recapitalisation of the country’s savings banks.
Last week the government and the trade unions agreed a pension reform that will raise the retirement age from 65 to 67. “We have to spearhead, lead the way forward with the control of public spending for the autonomous regions,” Mr Zapatero said in an FT interview two weeks ago. And they have to deliver. “They have to fulfil those obligations because, if they don’t, the government will act.”
Mr Mas-Colell, a former Harvard economics professor, acknowledged that raising so much debt would depend on permission from the Spanish central government and on the markets.
“We will try the international markets, we will try the Spanish credit market,” he said. “And then there’s the retail market.”
Like the central government, Catalonia has been obliged to slash its expenses. This month it moved to cut spending by 10 per cent, the first year-on-year reduction in the three decades of the post-Franco history of the Generalitat, the regional government.
Catalans have long complained that their region is what Mr Mas-Colell calls “structurally underfunded” because of excessive transfers to poorer regions in accordance with the Spanish constitution.
In Madrid, however, politicians and business leaders say the sovereign debt crisis has exposed the financial wastefulness of Spain’s highly devolved system of government in which the three main layers – central, regional and municipal – sometimes overlap.
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