Thursday, March 29, 2012

The escalation of Spain's regional debt

As the Spanish government spreads grind higher, it is becoming increasingly clear that Spain will have a difficult time reaching its target of 5.3% debt to GDP this year and particularly the 3% targeted for next year. Goldman's latest report is forecasting this year's number to be 6.8% and next year to be double the target of 6%. Achieving targeted fiscal consolidation will be nearly impossible, at least in the near term.

Recent movements in 5yr  Spain-Germany spread (Bloomberg)

But a more dangerous development in Spain's fiscal conditions is the increasing leverage of regional governments, which account for close to half of public spending in Spain. As the central government tries to reign in spending, the local governments attempt to pick up the slack. Regional government debt as a percentage of regional GDP has spiked materially in the last few years.

Source: GS

And the situation seems to be getting far worse with current regional budget balances all in the red.

Source: GS

Spain's central government is trying to pressure regional governments to contribute to the overall debt reduction. But the regions' local politicians are often not incentivized to comply. The tension between the regional and the national governments have been escalating.
Reuters: ... following Sunday's regional election result, which denied Rajoy the absolute majority he had hoped would reinforce his mandate for spending cuts, the prime minister will have to measure his next steps to avoid sparking more protests.
The Law for Budget Stability which is going into effect later this year should help apply pressure on the regional governments to control spending increases. But ultimately it looks as though the central government will need to bail out a number regional governments just to allow them to pay their bills. That is not expected to be constructive for Spain's overall fiscal consolidation.
Reuters: Police presence was particularly heavy around parliament where lawmakers were due to debate measures to help heavily indebted local and regional governments pay money owed to suppliers.
For further developments on the regional debt problem, see this BBC video
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