(The following statement was released by the rating agency)
July 16 - The Spanish central government demonstrated its intent to control regional government spending at last week’s joint council meeting - most importantly by imposing stricter deficit targets on the regions for 2013 and 2014. The Ministry of Finance will schedule regular meetings with the regions to help them achieve these goals.
The region’s deficit targets were changed to 0.7% and 0.1% for 2013 and 2014, respectively, from 1.1% and 1% at the Consejo de Politica Fiscal y Financiera (CPFF) meeting on Thursday. The stricter targets equate to a further EUR4.2bn adjustment for 2013. The CPFF meeting includes a representative from each of the 17 regions and 17 members of the central government.
These targets look very ambitious considering the 2010 and 2011 results and the ongoing economic environment, says Fitch Ratings. The central government has not yet announced the reason for such a change in the deficit targets. We believe it is unlikely the regions will be able to meet this target without further cuts in spending, even though they will benefit (but apparently only in 2014) from greater revenue from the government’s recently announced hike in the sales tax. The regions receive 58% of the proceeds from the sales tax.
The new Stability Law, which has been in force since April, allows the central government to intervene if it does not believe a particular region is going to meet the agreed targets. The central government’s hunger to keep the deficit programme on track is clearly shown by the announcement at the CPFF meeting that the autonomous regions will now inform the central government on a monthly basis about their budgetary position, and that the central government will schedule regular meetings to assess any potential for slippage.
The Ministry of Finance also indicated that a fund would be available to provide liquidity to the autonomous regions. This is a positive credit element for the regions - even if the details included in the conditions of eligibility are still missing - because it can reduce funding costs, and further indicates central government’s support. We consider the conditionality of the programme to be positive, as it will align the central and regional governments in their commitment to reach the targets.