• Seville statues. Grinan: 'We are taking resources away from health care and education to save the banks' (Photo: Lochaven)

Spanish regions raise doubts on EU budget pledge

02.08.12 @ 09:30

  1. By Andrew Rettman
  2. Andrew email

BRUSSELS - An escalating dispute between Madrid and Spain's regional authorities risks undoing its austerity pledge to EU authorities.

The conflict erupted on Tuesday (31 July) when Jose Antonio Grinan, the President of the Andalucia region, walked out of a meeting of Madrid's Council of Fiscal and Financial Policy when it told him to cut another €3 billion from his 2012 budget.

Catalonia boycotted the meeting in the first place, saying it already cannot pay some hospital, child-care and elderly-care centre workers.

Asturias and the Canary Islands voted against the council's demands. The Basque region also raised heckles.

Regional spending was the main reason why Spain last year missed its deficit targets under EU rules: Andalucia and Catalonia between them have a GDP of €346 billion, or 32 percent of the country's total economy.

Andalucia's Grinan renewed his attack on the government on Wednesday.

He said at a press conference in Seville, the Andalucian capital, that he would challenge Madrid's demands in Spain's Constitutional Court if need be.

The Socialist also fired a political broadside against conservative Prime Minister Mariano Rajoy.

"This [the proposed cuts] could close 19 hospitals, all of the Andalucian health service, or get rid of 60,000 public workers, one in four of the local governments workforce," he said at the press event, according to local news agency Europa Press.

"We are taking resources away from health care and education to save the banks, that is intolerable."

The rebellion comes at a sensitive moment for Spain, which is trying to convince markets that it can stick to a debt limit of 3 percent of GDP by 2014 and avoid asking for a full-blown state bailout.

The government is to auction €3 billion of bonds maturing between 2014 and 2022 on Thursday.

The sale is to take place a few hours before a European Central Bank (ECB) meeting in Frankfurt in order to capitalise on pre-meeting optimism.

The ECB is expected to say whether or not it will buy more Spanish bonds in future, but German opposition to the move hinges on lack of faith in southern countries' austerity promises.

Investors in any case are voting with their feet: the Bank of Spain noted capital flight of €41.3 billion in May, compared to €9.2 billion the same month last year.

For their part, ratings agency S&P and US bank Citibank in separate notes published on Wednesday said Spanish regions pose a threat to solvency.

S&P said its outlook will "be influenced by any large and persistent budgetary deviations by the regions ... as these deviations would increase net general government debt."

Citibank said Spain's "recently passed Budgetary Stability Law looks formidable on paper, but has yet to prove effective."

It added: "Political tensions between the centre and the regions may make the application of the Budgetary Stability Law more difficult, particularly in regions with strong regional identities, such as Catalonia."