Monday, May 24, 2010

Spain to block credit for local authorities

The latest effort to balance Spain's books came as the International Monetary Fund called for labour and banking sector reform and as press reports said the government would need 2.7 billion euros to save a local bank.

"The local authorities and those that depend on them ... cannot obtain long-term public or private credit, in any form, to fund their investments," a draft law said Monday,

The ban is valid until the end of 2011.

The measure is part of a two-year 15-billion-euro (19-billion-dollar) deficit-slashing plan announced earlier this month that includes a freeze on state pensions and an average five percent pay cut for civil servants.

The socialist government is under pressure to take action from both its EU partners and from the markets, which fear Spain could follow Greece -- Athens needed an unprecedented 110-billion-euro bailout by the EU and the IMF earlier this month to save it from bankruptcy.

The IMF on Monday said the "ambitious" fiscal consolidation in Spain needs to be "complemented with growth-enhancing structural reforms" in the labour market and banking sector.

As the eurozone crisis has unfolded, there have been concerns that local government debt could prove at least as big a problem as central government debt as governments try to put their public finances in order.

International ratings agency Standard and Poor's warned Spain last week that the nation's powerful regional governments face worsening deficits.

It predicted Spain's regional debt burden could surpass 110 percent of consolidated operating revenues in 2012, up from just 40 percent in 2007.

The debt of Spain's local authorities at end-2009 was 34.6 billion euros, equivalent to 3.3 percent of GDP, according to the finance ministry.

Overall, accumulated public debt was equivalent to 55 percent of GDP in 2009 and is expected to rise to 74 percent in 2012 as the public finances are further eroded.

The problem of local government debt has another side to it, raising issues of how appropriate such financing has been for them.

In Italy, for example, there have been worries that the country's economy faces huge risks from derivatives contracts taken out by local governments who did not fully understand what they were buying into.

Spanish Prime Minister Jose Luis Rodriguez Zapatero announced the main points of the latest austerity plan on May 11. The government approved it on Thursday but it must still be passed by parliament.

The measures are on top of a 50-billion-euro package announced in January designed to slash the public deficit to the eurozone limit of three percent of gross domestic product by 2013 from 11.2 percent last year.

Public finances faced further pressures after Spain's central bank on Saturday took control of a troubled regional savings bank, CajaSur.

A business newspaper, Expansion, said as much as 2.7 billion euros (3.38 billion dollars) may be needed to clean up the bank's 1.5 billion euros in doubtful debt and cover another 364 million euros in bad loans and the depreciation of property assets.

News of the rescue unsettled investors already nervous over the European debt crisis and sent European and US stocks lower on Monday.

The austerity measures have sparked widespread public anger.

Unions representing public sector workers have called a strike for June 8 over the latest austerity plan, while Spain's largest trade union, the CCOO, said Friday it would "probably" also call a national general strike.

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