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Moody's believes regions will miss deficit-reduction goal

Brussels urges Spain to adopt extra measures if required

Moody's Investors Service said Monday that the Spanish regions' inability to rein in spending could force the central government to make an additional fiscal effort to offset this and ensure the country meets its deficit-reduction target for the year.

Economy Minister Elena Salgado said last week that Spain's 17 regions booked a combined shortfall in their books of 13.06 billion euros, equivalent to 1.2 percent of GDP, when their target for the full year is 1.3 percent. Despite that, Salgado said she was confident Spain would meet its deficit-reduction deficit both at the national and regional level for this year. She plans to meet this week with regional leaders to discuss further belt-tightening measures.

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The government is aiming to trim the shortfall in its financial balance to six percent of GDP this year from 9.2 percent last year. The objective in 2010 was met thanks to an additional effort by the central government to offset the regions' failure to meet theirs. The government is ultimately aiming to bring the deficit back with the European Union ceiling of 3 percent of GDP in 2013.

In its report released Monday, Moody's threw into question the government's ability to met its target given the outcome for the first six months of the year, an issue that could impact the country's debt rating.

Moody's placed Spain's Aa2 rating on review for possible downgrade on July 29. However, it said it viewed positively a constitutional reform approved this month enshrining the obligation of the part of government to maintain budget discipline. That in itself, however, will not facilitate the immediate task in hand of reducing the shortfall in its books.

Separately, the European Commission said in its 2011 report on public finances in the EU that Spain should be ready to adopt additional measures to meet its targets if budgetary and economic conditions do not turn out as expected.

The government plans on Friday to approve a decree reactivating a dormant wealth tax from which it hopes to take in an additional 1.4 billion euros in annual revenues.

The Commission also identified the regions as a source of risk as well as the government's economic forecasts, which remain more optimistic than those of the EC. "There are downside risks to the consolidation path related to the underlying macroeconomic assumptions and to the respect of budgetary targets at the regional level," the report said. "Regions account for a large share of total public expenditure and nine out of 17 exceeded their fiscal objectives in 2010."

Brussels is sticking to its forecast that the budget deficit for this year will come in at 6.3 percent of GDP, 0.3 points above the government's target.

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