Eurozone crisis focuses on Andalucía, home to sun, sand and soaring deficits

Senior Spanish officials admitted they were clueless as to the real size of the debt in the biggest region of all

Electoral posters in Seville, Andalucia, March 2012
Electoral posters in Seville, Andalucia, March 2012. Brussels and international bond markets are becoming increasingly worried about Spain’s indebted regions. Photograph: Marcelo Del Pozo/REUTERS

It sells itself to British tourists as a holiday heaven of golden beaches, flamenco dresses and well-stocked sherry bars, but southern Andalucía – home to the Costa del Sol – has now become the focus of worries about the euro.

As inspectors from Brussels demanded answers this week from the Spanish government about how it plans to bring profligate regional governments under control, senior officials admitted they were clueless as to the real size of the debt in the biggest region – party-loving Andalucía.

Antonio Beteta, the junior minister responsible for the regions, claimed that Andalucía was cooking its books and hiding unpaid bills to cover up that debt.
“Andalucía is not being transparent,” he said. “There is a problem of both transparency and credibility.”

Officials in Andalucía reacted angrily to the claims that they were hiding debt. “I demand that the EU inspectors come to Andalucía and look at our accounts, because they are not opaque and there is no hidden deficit,” the region’s finance boss Carmen Martínez told El País newspaper.

Beteta’s words will not trouble British tourists practising their golf swing or soaking up the sun on Andalucía’s Mediterranean beaches, but they must have produced shudders in Brussels – and on the international bond markets that now view Spain as the biggest threat to the euro.

Their worries are centred on the 17 regional governments, which together spend almost four out of every 10 euros of Spain’s public money – as much as bailed-out Greece and Portugal spend together.

Last year, despite Spanish pledges of austerity, the regions failed to cut their joint deficit by a single euro – sending Spain’s total deficit wildly off target and leaving its reputation for budget control in tatters.

That left the country having to borrow some €17bn (£14bn) more than expected, with wary markets demanding ever higher interest rates as what was once one of Europe‘s lowest sovereign debts swelled.

A new conservative government led by Mariano Rajoy of the People’s party has so far failed to convince investors it can tame the regions and has seen bond yields soar over the past fortnight.

On Friday 10-year bond yields – the interest rate investors demand to lend money to Spain – were pushed up to breach 6%.

Andalucía was one of eight regions that ignored government demands last year to embrace intense austerity, and which produced even higher deficits than in 2010.

Beteta has warned civil servants in the regions, where payrolls swelled by 42% between 2006 and 2010 as local politicians expanded their power bases, that they must change their culture of “coffee breaks and reading the newspaper”.

Regional politicians are behind some of Spain’s biggest and most costly white elephants. From Valencia’s huge, spaceship-like City of the Arts and Sciences to Santiago de Compostela’s vast, half-empty City of Culture, loss-making monuments to their vanity abound.

A race to construct flashy public buildings by cutting-edge architects, combined with a taste for under-used infrastructure projects, has helped push up debt and deficit. So, too, have regional broadcasters whose vast workforces can dwarf their puny audience shares.

On Friday the huge airport in Ciudad Real, 115 miles south of Madrid, shut after attempts to turn it into the capital’s second airport failed. Its runways are now closed to the handful of private jets that brought wealthy hunting parties, some including British royals, to kill deer in the region’s overstocked private estates.

Ciudad Real is in the central Castilla-La Mancha region, the worst regional offender last year with a deficit that grew to 7.3% of regional share of GDP. The local savings bank, partly controlled by politicians, had to be rescued by taxpayers after it lent too much to property developers and bankrupt projects – such as the airport.

In Madrid on Friday Brussels inspectors were seeking answers to how Spain thinks it can manage to meet its national deficit target of 5.3% of GDP this year. Many economists consider the task impossible, though Rajoy insists his government will make it.

The inspectors were expected to demand proof that Rajoy’s government can avoid the pitfalls of last year.

The prime minister has this month presented a budget with €27bn of tax rises and spending cuts in the central government budget, but the key to meeting targets lies in the regions. Last year they failed to cut any of the €17bn they were asked to find. This year they have been set a savings target of €15bn.

The socialist government of José Luis Rodríguez Zapatero, which lost elections in November, had claimed until the end that the regions were under control. The finance minister Elena Salgado even claimed the regions had produced a budget surplus during the third quarter.

But Spain was off track. It had promised its national deficit would drop from 9.5% of GDP to 6%, but turned in an 8.5% deficit that made it the laughing stock of austerity Europe – and left Rajoy’s new government having to clean up the mess, which also includes 24% unemployment and a recession that will shrink the economy by 1.7%.

The regions provide the key amenities of the welfare state, such as health and education, so regional austerity means cuts to basic services. Protests have been loudest and, on occasions violent, in regions that managed some deficit reduction last year, such as Catalonia and Murcia.

Spooked by market pressure, Rajoy last week announced a further €10bn in health and education “savings”, which will be implemented by the regions. On Thursday, the government passed a law that allows it to take control of the finances of regions that fail to stick to the austerity plans .

Rajoy, however, may find it politically inopportune to take control of three of the four regions that account for most of the deficit headache.

They include Valencia and Castilla-La Mancha, which – like most of the regions – are run by his party, and Catalonia, where any central government intervention would inflame nationalist sentiment.

He may, however, enjoy taking control of the finances of Andalucía, which is run by the opposition socialists. Rajoy’s party failed to win elections for the region’s parliament in March.

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