Spain’s regions remain in trouble despite yield fall, SG warns

Even if Spain’s two-year bond yield has fallen back below 3%, raising hopes that the possible ECB intervention will be enough to ensure continued market access to the country, James Nixon, chief European economist at Societe Generale, remains skeptical on the government’s ability to meet this year’s fiscal targets.

“Similar to last year, the biggest overshot of these targets is likely to come from the regions, but this simply reflects the inelastic nature of their expenditures and the central government’s unrealistic attempts to foist the bulk of the fiscal adjustment onto the shoulders of the autonomous regions,” he said.

According to a note released by the bank, this will appear when the real extent of the regions’ borrowing needs becomes apparent, forcing the government to seek a rescue facility.

“We believe the Spanish government has enough incentive to postpone such a decision until after the regional elections in Galicia and the Basque Country on 21 October,” he added.

Pressured on tax-raising abilities by the central government, the regions are also responsible for delivering many of the services, typically health and education, which in normal times might be regarded as integral to a country’s automatic stabilisers.

Yet, the central government has decreed that at least half of Spain’s austerity programme should fall to the regions.

“Back in March, the central government postponed the 2012 budget until after the regional elections in Andalusia and Asturias. When eventually presented, the budget identified some €27.3bn of savings that would reduce the central government’s deficit from 5.1% in 2011 to 3.5% this year,” the French bank added.

Roughly 2.5% fiscal adjustment was expected to deliver only a 1.6 percentage point improvement in the central government’s finances.

However, appearing almost as a line item in the government’s budget presentation was the forecast that the autonomous regions were to reduce their deficit from 2.9% of GDP to 1.5% in 2012 – a deficit reduction of some 1.4% of GDP.

“Given the similarity in the size of deficit reductions planned for both the regions and the central government, the implication was that the regions were expected to undertake a least a similar-sized adjustment this year,” Nixon said.

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