Andalusia rebels against debt ceiling imposed by Madrid

Andalusia on Wednesday continued to rebel against the austerity measures imposed by Finance Minister Cristóbal Montoro and appealed to Prime Minister Mariano Rajoy to reconsider the debt ceiling imposed on the region, which it claimed would force it to cut basic services.

The Socialist premier of Andalusia, José Antonio Griñán, said the cap on its debt levels of 13.2 percent of GDP for next year meant it could not draw up the regional budget for 2013 without closing schools and hospitals, which would imply having to sack 60,000 workers.

The debt ceiling imposed on Andalusia involves a cut of 1.9 percentage points from current levels, and means that the region will have to cut planned debt issues by 2.7 billion euros, equivalent to a reduction of 10 percent in spending.

“For us, the primary objective is education and any cut in resources impoverishes Spain,” Griñán said.

The regional premier complained that the central government has prioritized taking on debt of up to 100 billion euros from Europe to recapitalize the country’s banks rather than maintaining spending on education and health.

“The privatization of public services is not a saving,” Griñán said. “That’s a lie; it’s an ideological decision.”

Andalusia’s representative walked out of a meeting of the Council for Fiscal and Financial Policy held Tuesday to protest the austerity measures imposed by the central government.

Catalonia boycotted the meeting, while Asturias and the Canary Islands voted against the measures, which were supported by regions controlled by the ruling conservative Popular Party.

The Council meeting approved an overall debt ceiling for the regions of 15.1 percent of GDP for this year and 16 percent for the following year. Catalonia’s debt ceiling was set at 22.81 percent of GDP, Valencia’s and Madrid’s at 9.87 percent and the Basque Country’s at 10.19 percent.

The central government has lowered the deficit target for the regions for next year to 0.7 percent of GDP from 1.1 percent previously. The target for this year is 1.5 percent of GDP.

After Tuesday’s meeting, Montoro said: “An overwhelming majority of regions came out in favor of the deficit targets and debt ceilings. That is what is important.”

The Andalusian commissioner for the economy, Carmen Martínez Aguayo, abandoned Tuesday’s meeting because of what she described as “unfair and discriminatory” targets imposed on Spain’s biggest region, whose financial situation is more comfortable than that of others.

Fitch last week described the new deficit targets as “very ambitious” given that the Spanish economy is expected to remain in recession this year and the next. “We believe it is unlikely the regions will be able to meet this target without further cuts in spending,” the ratings agency said.

The regions were the main reason behind the blowout in Spain’s public deficit last year, which hit 8.9 percent of GDP instead of the target of 6 percent.

The European Commission has agreed to give Spain a further year to bring the shortfall in its finances back within the European Union ceiling of 3 percent of GDP, which it now must do by 2014. It relaxed the target for this year to 6.3 percent of GDP from an initial 5.3 percent and set a goal for 2013 of 4.5 percent.

Regions such as Andalusia and Catalonia wanted Madrid to also cut them some slack in meeting the deficit requirements but the central government insists it needs the leeway afforded by Brussels for itself.

The central government’s deficit in the first half of the year stood at 4.04 percent, compared with a target for the full year of 3.5 percent. The main reason for the blowout was transfers to other sectors of the public administration such as the regions, whose access to the debt markets has been cut off because of the sharp rise in Spain’s risk premium.

S&P confirms Spain's rating

Standard & Poor’s on Wednesday confirmed Spain’s sovereign rating at BBB+ on the basis that the country would continue to receive support from its European partners and the European Central Bank.

However, S&P maintained its negative outlook on the rating, highlighting the fact that Spain is “vulnerable to delays or setbacks in the euro zone’s plans to pool sufficient common resources.” It said Spain also faces the risk of a bigger-than-expected recession. The government estimated GDP will contract 1.5 percent this year and 0.5 percent the following.

On the positive side the ratings agency lauded the government’s firm commitment to reducing the public deficit and its reform agenda. It said the economy is also adjusting rapidly to the need to focus on exports, given the weakness of domestic demand due to the austerity drive and high unemployment.