The wood, the trees and the Spanish regions

At least one market strategist in Madrid, Daniel Pingarrón of IG, called it the ‘Rajoy effect’. Most acknowledged in any case that risk premiums on Spain’s debt paper, and consequently the costs of credit, decreased after prime minister Mariano Rajoy announced during Wednesday’s State of the Nation debate that the public deficit for 2012 would fall barely below 7 percent.

The figure still reveals that the government in Madrid has been unable to comply with the target of 6.3 percent marked by Brussels, but analysts said it was better than expected just a few weeks ago. “There are almost no precedents of such fiscal adjustment,” Pingarrón argued not without reason: this correction means that Spain would have cut some 2.5 percent off its overspending in one year.

Investors agree. Yesterday’s 2-billion bond issue in US dollars by the Spanish Treasury received a demand for $3 billion and the majority of buyers were non-resident, according to Santander Global. On Tuesday, Spain placed €4 billion, and €4.2 billion at two, six and 10 years Thursday. “Obviously, comments by Mr Rajoy of a reduction of the deficit of €21 billion helped the Treasury issuance,” Santander researchers said.

But the Rajoy government is far from done with austerity. The European Commission will push for more reforms, and so the Spanish prime minister talked of new legislation for the labour market, for instance. He did not explicitly mentioned, though, a trickier change the Spanish press is all rumours about: Madrid could tighten regions’ market financing by pulling their maximum overprice level down to 100 basis points from 250 more than the cost of borrowing for the central government.

The move sounds quite right, in principle. Autonomous regions will be barred from issuing debt at too high interest rates. Risk agency Standard & Poor’s on Wednesday let investors know that, as things stand, it would not downgraded Spain, which seems a good excuse for the Spanish government to reassure doubters that the situation is under control, particularly regions that have during the last year attracted many of the negative headlines the country has suffered. The efficiency of this proposal, though, is altogether a different matter.

As Santander analysts pointed out today, this measure will “force most regions to ask the central government for credit in exchange of losing autonomy.” Madrid should never be afraid of the conflicts that rearrangements will probably spark, to be sure, but it will only succeed when the regional government in question has a clear poor reputation managing its own finances. And the trouble is that while regions account for only 35 percent of the public budget (and 90 percent of it is spent in health, social and education services), their deficit target is of a stringent 0.7 percent.

The central government–and local authorities–are responsible for 65 percent of the budget and yet their deficit target is very moderate in comparison, 3.8 percent. Madrid appears to have lost sight of the wood from the trees, but the regional puzzle–which needs undergo a consolidation process if prime minister Rajoy is serious about achieving sustainable public budgets–must not get in the way of trimming deficits with rational plans. It’s time to share the pain within all Spain’s administrative layers in a more balanced equation.

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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