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Zapatero's Bid to Avoid Greek Fate Hobbled by Regions
March 18 (Bloomberg) -- Prime Minister Jose Luis Rodriguez Zapatero's drive to show Spain can avoid Greece's fate is being held hostage by the country's regional governments.
As Zapatero tries to cut the euro area's third-highest budget deficit, regional chiefs facing elections over the next year are refusing to trim spending. The European Commission said yesterday Spain may need deeper budget cuts to meet its deficit goals, and the regions' performance is "an additional risk." Zapatero's room to maneuver is limited by the 17 regions that control 37 percent of public spending.
Zapatero is being hobbled by a 30-year shift in power to Catalonia, the Basque country and other territories that now control almost twice as much spending as the Madrid government. The risk is that Zapatero won't be able to move fast enough on a deficit that climbed to 11.4 percent of gross domestic product last year. That may prompt investors to consider dumping Spanish bonds along with their Greek counterparts.
"The pressure is on, but I think some regions will resist," said Angel de la Fuente, an economist at the National Research Council's Institute of Economic Analysis in Barcelona and the author of several books on regional economics. The Greek crisis is a "useful scare" showing what may happen to Spain if it doesn't get its finances in order.
Additional Measures
Spain may need to adopt additional budget cuts to meet its goal of bringing the shortfall back within the EU's 3 percent limit in 2013 as the government's economic forecasts are too optimistic, the commission said yesterday in a report.
With government forecasts showing the regions will account for more than half of Spain's 7.5 percent deficit in 2011, Finance Minister Elena Salgado will try to forge a pact with local politicians this month after a push by Zapatero failed in December.
Zapatero's struggle to break the stalemate is shining a spotlight on a country whose economy is four times the size of Greece and has a jobless rate of 18.8 percent, the euro region's highest.
The extra yield investors demand to hold Spanish debt rather than German equivalents is 77 basis points. While that's about a quarter of Greece's spread, it's still almost double what it was two years ago. Spain sold almost 5 billion euros ($6.9 billion) of 10- and 31-year bonds today at yields lower than those of existing securities.
'Next Greece'
"No country wants to be the next Greece," said Olaf Penninga, a senior portfolio manager at Robeco Group in Rotterdam, which manages 140 billion euros ($192.5 billion). It has sold most of its Spanish government bonds, replacing them with Italian equivalents. The Greek crisis "has clearly put more pressure on Spain to take credible measures to reduce the deficit."
The government will have to contend with opponents such as Madrid President Esperanza Aguirre from the People's Party, who called on March 10 for a "rebellion" against a proposal to raise sales tax to 18 percent from 16 percent.
Even Zapatero's allies are showing resistance. Angel Agudo, economy chief in the northern Cantabria territory, was quoted by newswire Efe last month as saying the deficit-cutting burden needs to be shared and he won't "pick up other people's bill." Fourteen regions will probably hold elections by the end of 2011.
Property Tax Slump
Regional governments, which control health and education spending, are reluctant to join the deficit-cutting drive as the recession reduces the flow of funds they receive from the central government. Taxes tied to property sales, which accounted for as much as 20 percent of some regions' revenue in the boom, have declined to half of that, Standard & Poor's estimates.
"The key problem is that the regions have been given power over spending without the responsibility of having to go to the taxpayer to ask for money," said Luis Garicano, an economics professor at the London School of Economics. "They don't have the right incentives to spend in line with their revenue capabilities."
Spain's atomized structure, which has evolved since the death of General Francisco Franco in 1975, contrasts with the more centralized powers of the Irish government. While Zapatero needs to curry favor with regional rulers to make sure cuts are made, his counterpart in Ireland only needed a majority in the national parliament to pass unprecedented austerity packages.
Ratings Concern
The deficit stalemate may start to weigh further on credit ratings. S&P, which cut Spain one notch to AA+ last year, says regional governments may see downgrades this year.
Spain may be "over-optimistic" on revenues, said Myriam Fernandez de Heredia, head of the company's European local and regional government team. Catalonia is one of the lowest-rated Spanish regions on AA-, and the Madrid region is rated AA. Fitch Ratings, which has an AAA rating on Spain, is skeptical that regions can cut spending growth to 2.6 percent this year as budgeted, compared with an average of 9 percent in the five years through 2007.
Nor can Madrid claw back the power it has ceded and assert its authority. The government's lack of control was clear on Jan. 29 when it presented a plan to save 50 billion euros by 2013 that left the section on regional finances blank.
"Everybody still remembers the initial presentation with the holes," Penninga said.
Debt Sales
The one measure of control the government does have is that it has to sign off on regions' debt issuance. Carlos Ocana, the deputy finance minister responsible for budgets, said on Feb. 24 that the central government would be "rigorous" this year when assessing borrowing needs.
For Zapatero, the challenge will be to cajole regions into cutting spending without losing support in the national assembly, where he lacks a majority and needs the backing of parties such as Catalonia's Republican Left, the National Galician Block or the Nationalist Basque Party.
"Politically, it's difficult because the government also needs the votes of certain parties to govern," said Alfredo Pastor, a former deputy finance minister and a professor at IESE business school in Madrid. "Cutting expenditure is harder than it looks."
To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
Find out more about Bloomberg for iPhone: http://m.bloomberg.com/iphone
Zapatero's Bid to Avoid Greek Fate Hobbled by Regions
March 18 (Bloomberg) -- Prime Minister Jose Luis Rodriguez Zapatero's drive to show Spain can avoid Greece's fate is being held hostage by the country's regional governments.
As Zapatero tries to cut the euro area's third-highest budget deficit, regional chiefs facing elections over the next year are refusing to trim spending. The European Commission said yesterday Spain may need deeper budget cuts to meet its deficit goals, and the regions' performance is "an additional risk." Zapatero's room to maneuver is limited by the 17 regions that control 37 percent of public spending.
Zapatero is being hobbled by a 30-year shift in power to Catalonia, the Basque country and other territories that now control almost twice as much spending as the Madrid government. The risk is that Zapatero won't be able to move fast enough on a deficit that climbed to 11.4 percent of gross domestic product last year. That may prompt investors to consider dumping Spanish bonds along with their Greek counterparts.
"The pressure is on, but I think some regions will resist," said Angel de la Fuente, an economist at the National Research Council's Institute of Economic Analysis in Barcelona and the author of several books on regional economics. The Greek crisis is a "useful scare" showing what may happen to Spain if it doesn't get its finances in order.
Additional Measures
Spain may need to adopt additional budget cuts to meet its goal of bringing the shortfall back within the EU's 3 percent limit in 2013 as the government's economic forecasts are too optimistic, the commission said yesterday in a report.
With government forecasts showing the regions will account for more than half of Spain's 7.5 percent deficit in 2011, Finance Minister Elena Salgado will try to forge a pact with local politicians this month after a push by Zapatero failed in December.
Zapatero's struggle to break the stalemate is shining a spotlight on a country whose economy is four times the size of Greece and has a jobless rate of 18.8 percent, the euro region's highest.
The extra yield investors demand to hold Spanish debt rather than German equivalents is 77 basis points. While that's about a quarter of Greece's spread, it's still almost double what it was two years ago. Spain sold almost 5 billion euros ($6.9 billion) of 10- and 31-year bonds today at yields lower than those of existing securities.
'Next Greece'
"No country wants to be the next Greece," said Olaf Penninga, a senior portfolio manager at Robeco Group in Rotterdam, which manages 140 billion euros ($192.5 billion). It has sold most of its Spanish government bonds, replacing them with Italian equivalents. The Greek crisis "has clearly put more pressure on Spain to take credible measures to reduce the deficit."
The government will have to contend with opponents such as Madrid President Esperanza Aguirre from the People's Party, who called on March 10 for a "rebellion" against a proposal to raise sales tax to 18 percent from 16 percent.
Even Zapatero's allies are showing resistance. Angel Agudo, economy chief in the northern Cantabria territory, was quoted by newswire Efe last month as saying the deficit-cutting burden needs to be shared and he won't "pick up other people's bill." Fourteen regions will probably hold elections by the end of 2011.
Property Tax Slump
Regional governments, which control health and education spending, are reluctant to join the deficit-cutting drive as the recession reduces the flow of funds they receive from the central government. Taxes tied to property sales, which accounted for as much as 20 percent of some regions' revenue in the boom, have declined to half of that, Standard & Poor's estimates.
"The key problem is that the regions have been given power over spending without the responsibility of having to go to the taxpayer to ask for money," said Luis Garicano, an economics professor at the London School of Economics. "They don't have the right incentives to spend in line with their revenue capabilities."
Spain's atomized structure, which has evolved since the death of General Francisco Franco in 1975, contrasts with the more centralized powers of the Irish government. While Zapatero needs to curry favor with regional rulers to make sure cuts are made, his counterpart in Ireland only needed a majority in the national parliament to pass unprecedented austerity packages.
Ratings Concern
The deficit stalemate may start to weigh further on credit ratings. S&P, which cut Spain one notch to AA+ last year, says regional governments may see downgrades this year.
Spain may be "over-optimistic" on revenues, said Myriam Fernandez de Heredia, head of the company's European local and regional government team. Catalonia is one of the lowest-rated Spanish regions on AA-, and the Madrid region is rated AA. Fitch Ratings, which has an AAA rating on Spain, is skeptical that regions can cut spending growth to 2.6 percent this year as budgeted, compared with an average of 9 percent in the five years through 2007.
Nor can Madrid claw back the power it has ceded and assert its authority. The government's lack of control was clear on Jan. 29 when it presented a plan to save 50 billion euros by 2013 that left the section on regional finances blank.
"Everybody still remembers the initial presentation with the holes," Penninga said.
Debt Sales
The one measure of control the government does have is that it has to sign off on regions' debt issuance. Carlos Ocana, the deputy finance minister responsible for budgets, said on Feb. 24 that the central government would be "rigorous" this year when assessing borrowing needs.
For Zapatero, the challenge will be to cajole regions into cutting spending without losing support in the national assembly, where he lacks a majority and needs the backing of parties such as Catalonia's Republican Left, the National Galician Block or the Nationalist Basque Party.
"Politically, it's difficult because the government also needs the votes of certain parties to govern," said Alfredo Pastor, a former deputy finance minister and a professor at IESE business school in Madrid. "Cutting expenditure is harder than it looks."
To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
Find out more about Bloomberg for iPhone: http://m.bloomberg.com/iphone
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