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Spain paying the price of regional overspending

Spain's regional authorities have been racking up large deficits through heavy social spending and construction. As a result, Spain will probably miss its deficit-reduction target this year.

November 10, 2011|By Henry Chu and Guy Hedgecoe, Los Angeles Times
  • Signs announcing the closure of a store greet a passerby in Pamplona, northern Spain. Austerity has become the watchword throughout Europe amid the Eurozone debt crisis.
Signs announcing the closure of a store greet a passerby in Pamplona, northern… (Alvaro Barrientos / Associated…)

Reporting from London and Madrid — In the heart of Don Quixote country sits an airport whose outsized ambitions match those of Cervantes' immortal creation.

Opened three years ago, Ciudad Real Central Airport boasts a runway long enough for the world's biggest jumbo jets. Its backers confidently predicted that several million passengers would pass through each year, relieving traffic at Madrid's busy international hub nearly 150 miles to the north.

But only 33,000 people bothered to use the state-of-the-art facility in 2010. The ill-conceived airport, which cost about $1.5 billion to build and was subsidized by the Castilla-La Mancha regional government, now stands a good chance of being closed down.

More than just an embarrassing white elephant, the airport helps illustrate why Europe's relentless debt crisis goes far deeper than national governments. Profligate local government spending across the European Union constitutes ticking time bombs that policymakers are only beginning to deal with.

Through heavy social spending and investments in major building projects, Spain is one country whose regional authorities have been living beyond their means and racking up large budget deficits. Those gaps were sustainable during boom times, but in the current economic climate, they threaten to push Spain toward a financial reckoning that could have consequences far beyond its borders.

Regional overspending is likely to cause the central government in Madrid to miss its target of bringing the nation's overall deficit down to 6% of gross domestic product this year, considered crucial to maintain investor confidence. For that reduction to happen, Spain's 17 regional governments were told to post budget shortfalls amounting to no more than 1.3% of GDP, but they almost reached that level after just the first six months of the year.

"If the regions surpass their deficit limits, then they can send Spain as a whole off course," said Ismael Sanz, an analyst at King Juan Carlos University in Madrid.

In France, hundreds of municipalities appear headed for a financial crunch, including even the glitzy resort town of St. Tropez, which faces problems in part because of loans denominated in Swiss francs, a currency whose value has appreciated considerably over the years compared with the euro.

Towns and provinces in Italy, whose financial woes have roiled markets around the world, are also hard hit. Moody's credit rating agency downgraded the creditworthiness of 30 local government entities last month, including the historic city of Florence and the region of Lombardy.

Spain's Iberian neighbor, Portugal, was flabbergasted this year when auditors found that the governor of Madeira island had hidden $1.8 billion in debts in public accounts, the result of wild overspending on projects such as an extensive network of roads.

The unwelcome discovery forced Portugal, one of three European countries to have sought an international bailout, to revise its 2010 deficit to 9.8% of GDP, up from 9.1%. By agreement, the 17 nations that share the euro currency are supposed to keep their deficits to a maximum of 3%.

Madeira's controversial governor, Alberto Joao Jardim, who has headed the island for 33 years and is one of the world's longest-serving democratically elected leaders, remains unrepentant.

"I'm proud of having contracted debts. God bless the debt.... It has been put to the service of the dignity of every man and every woman," Jardim declared at a campaign rally before regional elections last month. He won another term.

Such reckless spending, though, is now being punished as global investors eye debt at all levels of government with increasing wariness.

Last month, the credit ratings of 10 of Spain's regions were downgraded, including the economic powerhouse of Catalonia, home to Barcelona. The Catalonian government has taken the unusual step of selling up to $5 billion in bonds to private citizens to fund its debt because it has in effect been shut out of the commercial markets owing to the deepening euro debt crisis.

In Castilla-La Mancha, an agricultural region whose flat expanses were made famous by Cervantes' classic novel, the financial woes have become particularly acute. Its credit rating from Moody's Investor Services has been relegated to junk status.

During the good times, as low interest rates stemming from Spain's membership in the Eurozone fattened a real-estate bubble across the country, local authorities went on a spending spree.

"It seems that every single village has gotten itself a new sports center and a new cultural center in the last few years," said Juan Antequera, who sells farming equipment. "But the truth is, these things weren't that necessary."

That included Ciudad Real Central Airport, which "everyone knew we didn't really need," Antequera said.

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