Austerity battle threatens to become Catalan conflict

Indebted region hints it may defy restriction on debt issue

Spain's battle to reduce the public deficit is moving to the regional level. A day after Prime Minister José Luis Rodríguez Zapatero told the Financial Times that the central government will not let the regions sink further into debt if they are running excessive deficits, the secretary of state for finance, Carlos Ocaña, confirmed that Madrid will limit Catalonia's ability to issue debt after learning that the region's finances are worse than expected.

The Catalan deficit for 2010 will be in the region of 3.6 percent of regional GDP, the equivalent ofseven billion euros. This figure clearly surpasses the 2.4-percent target that all regional governments must meet. This means that the Treasury can prevent Catalonia from issuing short-term debt, a move that will extend to all other regions that exceed the target. "It's a way in which the Spanish system applies a form of discipline to the regions," Ocaña said.

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The Catalan government was swift to reply that "these statements can turn against the Spanish government, like a boomerang," in the words of spokesman Francesc Homs, who said Catalonia would oppose any reforms to reduce its powers of self-rule.

The Generalitat is holding Zapatero's administration partly responsible for Catalonia's financial straits, since the region was run by the Socialists for four years before the return to nationalist rule in last November's elections. "We are where we are because of the decisions made by the Socialist Party, both in Spain and in Catalonia," said Homs.

Despite these figures, Ocaña said that the 9.3-percent deficit forecast for the country as a whole would be met "easily" and added that in the current economic situation, it is critical for regions "to do what they have to do." While Brussels seems satisfied with Spain's deficit-cutting measures, which include pension and labor reform, there are doubts whether the regions are able or willing to tackle their own deficits.

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