The conservative Spanish government of Mariano Rajoy expects to take direct financial control of at least one of the country's ailing regional governments by May, according to sources in Madrid. With some regional debt already downgraded to junk, senior officials said it would be the regional governments themselves that came to Madrid to beg for help to get through the year.
International lenders are expected to welcome the plans after a series of warnings about the deteriorating state of the Spanish economy. Government borrowing costs jumped above 6% on Monday as foreign investors expressed their growing fears for Rajoy's administration and the prospect of a major default. The rate, or yield, on the country's 10-year government bonds hit 6.1%, the highest since December. Spain's Ibex 35-share index fell to 7245, down from February's 2012-high of 8902.
Across Europe, markets recovered some of the losses from sharp falls last week. The FTSE 100 was up 37 points at 5689 after a drop to 5579 on Wednesday. Worries about Spanish bank loans to the beleaguered construction sector, bankrupt property developers and €50bn (£41.2bn) of outstanding debts in Portugal have unnerved investors.
Markets are almost shut to some of Spain's 17 regions, so their best hope of financing deficit spending and rolling over debt is Rajoy's administration, which has passed tough new laws giving it the right to intervene in the regional governments. Government sources said the new law meant the regions, which control 37% of Spain's public spending, could be forced to impose greater austerity to meet the deficit targets they missed so spectacularly in 2011.
The regions, which run health, education and other essential services, were largely responsible for Spain's failure to bring its deficit under control last year, leaving investors and other eurozone countries worried that they had become untameable.
Fellow eurozone countries have told Spain, which is now seen as the greatest threat to the common currency, to slash its deficit from 8.5% to 5.3% this year in what will be one of Europe's most stringent austerity programmes.
Rajoy's government has announced €27bn of cuts in central government spending, but the biggest worry remains the regions – which failed to cut their deficit at all last year.
To make Matters worse, Spain's finance minister, Luis de Guindos, admitted on Monday that the country, whose economy is projected to shrink by 1.7% this year, had entered recession in the first quarter. Brussels would force Spain to cut its structural deficit to 3.5% of GDP this year. The structural deficit is the shortfall in a country's finances that is not explained by cyclical factors such as booms and downturns.
Source URL: http://www.guardian.co.uk/business/2012/apr/16/full-crisis-mode-return-spain-regions
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