Madrid agrees to share deficit leeway granted by Brussels with the regions

In the face of heavy pressure, the central government on Tuesday agreed to share some of the leeway afforded Spain by the European Commission on its deficit-reduction program with the country’s financially stressed regions.

Brussels has given the government another year to bring the shortfall back within the European Union’s ceiling of three percent of GDP, which it is now committed to achieving in 2014. However, the regions committed themselves to meeting this year’s deficit target of 1.5 percent of GDP.

The agreement was reached at a summit of regional premiers presided over by Prime Minister Mariano Rajoy. Regions of both the ruling Popular Party and the main opposition Socialist Party had clamored for some slack on next year’s target of 0.7 percent.

Meanwhile, Rajoy rejected reports that a request for a second bailout from Europe by Spain was imminent.

“If there is some agency, or someone, who says that this weekend we are going to ask for a bailout, as they say, there are two possibilities: that this agency is right and has better information than I do, which is possible, or that is not the case, which may also be possible,” he said.

Despite Rajoy’s denial, the yield on Spain’s benchmark 10-year government bond eased to 5.777 percent. As a result, the spread with the German equivalent fell from 443 basis points on Monday to close at 429 on Tuesday.

Details of the relaxation of the region’s contribution to the deficit-reduction drive will be thrashed out by the Council for Fiscal and Financial Policy.

In the joint statement released after the meeting, Spain’s 17 regions and the exclaves of Melilla and Ceuta pledged to meet the deficit targets set by Brussels. “The premiers’ conference expresses its commitment to fiscal consolidation, which is essential to restore confidence in the Spanish economy,” the text read.

Cut off from the wholesale markets because of the spike in Spain’s risk premium, five of Spain’s 17 regions have already asked for loans from the government worth some 15.6 billion euros. These will be drawn from the Regional Liquidity Fund (FLA), which is being set up with resources of 18 billion euros.

The meeting was overshadowed by Catalonia’s calls for greater self-determination after Madrid rejected its request for a revenue-sharing fiscal pact, along the lines of that enjoyed by the Basque Country. Catalonia has asked for some five billion euros from the FLA.

The summit also agreed to revise the current system of regional funding with a view to possibly coming up with a new model in 2014.

Catalonia premier Artur Mas did not raise the separatist issue at the meeting nor the thorny issue of the fiscal pact, but a number of leaders from other regions voiced calls for unity to emerge from the economic crisis. However, Mas failed to attend a joint news conference with regional leaders and Rajoy after the meeting.

Speaking to the press, the prime minister expressed satisfaction at the consensus reached. “I find this encouraging and I believe this should be encouraging for everyone,” he said.