Atlantic International Partnership Headlines: Catalonia's President Aims to Lead in Taming Spain's Deficit

Toronto, Canada (PressExposure) July 24, 2011 -- []

The powerful leader of Spain's Catalonia region is vowing to do his share to cut the country's towering budget deficit, no matter the political cost, but is also calling on the central government in Madrid to push ahead with major unfinished economic reforms.

Cutting the budget deficits of Spain's regions is one part of the country's challenge, along with narrowing the central government's deficit and recapitalizing parts of its banking system, as it seeks to convince financial markets of its creditworthiness.

Spain has come under scrutiny from investors again as the euro zone's debt crisis has escalated over the past week. Spanish bond prices, like those of Italy, have suffered a selloff amid mounting concern over the festering debt crisis centered on Greece.

Last week, Catalonia's government started talks with unions to extend the working hours of public-sector employees in the northeastern region, while pushing forward with controversial plans to cut jobs and close some public-health-system facilities.

"Catalonia is providing an example of how to face the problems and provide solutions, even if they are solutions that provoke social backlashes," Catalonia President Artur Mas said in an interview last week in the Palau de la Generalitat, a medieval palace in what used to be Barcelona's Jewish quarter. "We are willing to assume these backlashes."

Mr. Mas wields considerable political and economic clout in a highly decentralized country in which regions control more than one-third of spending and basic services like health and education. Catalonia is the second most populous of Spain's 17 regions and has the biggest economy, as well as its own language and a history of struggles against Madrid for greater autonomy. Furthermore, Mr. Mas's Convergence and Union party of moderate Catalan nationalists is the third-biggest force in the Spanish Parliament and has been providing important support to the embattled minority government of Socialist Prime Minister José Luis Rodriguez Zapatero.

In the waning days of Mr. Zapatero's term-his four years are up in March-Mr. Mas is using his clout to try to ensure the prime minister stays the course with overhauls to the country's ailing economy. Although Spain's biggest opposition party, the conservative Popular Party, is calling for early elections, Mr. Mas said he would like to see the government finish the cleanup of a banking system suffering from the collapse of a decadelong housing boom and the overhaul of a rigid wage-bargaining system contributing to the country's 21% unemployment rate.

But, he warned, "If we see there isn't an agenda for reforms in October or November, there will have to be elections this fall."

The Catalan leader is also pushing for a relaxation of central government restrictions on its debt issuance. Despite a draconian 2011 budget that cuts expenditure by 10%, Catalonia is forecasting a budget deficit equal to 2.7% of its gross domestic product, twice Madrid's mandated target of 1.3%. Failure to comply with the target means that Madrid clamps down on debt issuance in an effort to force greater budget cuts. Madrid hasn't been allowing Catalonia much long-term debt issuance, forcing it to rely primarily on more expensive short-term debt instruments.

Catalonia has pledged it will meet its 1.3%-of-GDP target for 2012. Mr. Mas said that commitment, plus the "strong efforts" it is making to cut costs in 2011 should persuade the central government to allow it to issue cheaper long-term debt to refinance a €3 billion ($4.25 billion) one-year bond that matures in November. "I think we could have some good news on this front in September or October," Mr. Mas said.

Sebastien Hay, analyst at Moody's Investors Service in Madrid, said being able to refinance the €3 billion bond on favorable terms is the "key issue" for Catalonia at the moment. Moody's earlier this year downgraded Catalonia to A3 from A2, citing the region's budget overruns and increasing financing difficulties.

Mr. Mas's government says it cannot meet its 2011 deficit target, maintaining that the financial situation it found when it came to power in December was much worse than expected. Mr. Mas's ouster of the government of local Socialist party leader José Montilla marked a point of inflection for the Socialists' national political fortunes. Undermined by the deep economic crisis, the Socialists went on to lose control of six more regions in May and opinion polls show Mariano Rajoy's Popular Party would win a resounding victory if national elections were held today.

In addition, the new Catalonia government's move to sharply widen the expected budget deficit given by the outgoing authorities has had a knock-on effect. Many other new regional governments are now threatening to do the same. Mr. Mas said that he understood such revisions were "disquieting" for investors but that the central government has room to compensate for regional budget overruns again this year, like it did last year. "My impression is that Spain will comply with its 6%-of-GDP deficit target," he said. Last year, Spain had an overall budget deficit of just over 9% of GDP.

Catalonia has also led the regional austerity push with some of the country's most painful budget cuts. Its plans to cut funding to the treasured public-health service by 6% have triggered a strong popular backlash. On Wednesday, more than one hundred white-smocked hospital workers gathered in front of the Palau de la Generalitat to protest the closure of the small Dos de Maig hospital. Straining to make herself overheard over blowing whistles, Sandra Marin said local citizens are alarmed at the prospect of the closure of the 50-bed facility and its 410 workers are worried about their jobs. "They've said we will be relocated, but given the state of the Catalan health system, we're not too optimistic," said the 37-year-old lung specialist.

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Press Release Submitted On: July 24, 2011 at 6:13 am
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