Regions balance their books in the first quarter

Spain’s regions as a whole managed to balance their budgets in the first quarter of this year thanks to transfers from the central government, Finance Minister Cristóbal Montoro announced on Friday.

The regions were largely responsible for Spain overshooting its deficit target for last year of six percent of GDP by almost three percentage points, and doubts about the central government’s ability to sort out their finances has been one of the factors that has pushed Spain’s risk premium to new euro-era highs.

“The regions are making a big effort to achieve their public sector deficit targets,” Montoro told a news conference after the regular Friday Cabinet meeting. “The government’s plan has been bearing fruit since the start of the year.”

Madrid has imposed spending cuts on education and health on the regions worth some 10 billion euros as part of combined budget savings of 18.3 billion this year.

The government has set the regions a deficit target of 1.5 percent of GDP for this year. They suffered a shortfall last year of 3.3 percent of GDP, more than double the goal of 1.3 percent they had been set. Spain is aiming to cut its deficit from 8.9 percent of GDP to 5.3 percent this year.

The central government transferred some 10.1 billion euros to the regions at the start of the year, but that in turn caused the administration’s deficit to swell to 2.39 percent in the first four months of the year, compared to a target for the full year of 3.5 percent.

Montoro highlighted the fact that the regions’ accounts are now presented using the same methodology used for the National Accounts, with adjustments made by the State Public Accounts Department and the European Union’s statistic office Eurostat.

This is a consequence of the obligations set in the Budget Stability Law and imply a significant exercise in clarity and transparency on the part of the regions,” Montoro said. “Now we don’t have to wait until the end of the year to see how [the regions] are executing their budgets.”

Montoro said the government is readying a mechanism to ease the funding problems of the regions, which have been virtually cut off from the wholesale debt markets. “It will be ready next week because this requires modifications to organic laws,” Montoro said. There had been expectations that the Cabinet would approve a new mechanism on Friday.

The regions have urged the government to approve so-called hispanobonds, which would be issued by them but guaranteed by the central government. The regions face total debt maturities this year of close to 50 billion euros.

However, Madrid has rejected this formula as it fears it could weaken more profligate regions’ political will to tighten their belts. Instead, the central government wants to negotiate guarantees on debt issued by the regions on an individual basis in order to hold leverage over them over their financial performance.

Another of the reasons for the improved situation of the regions’ finances at the start of this year is the fact that spending increased notably last year ahead of the municipal and regional elections held in May 2011.