Catalonia may scupper deficit reduction goal, Moody's says

The blowout in the finances of the Spanish region of Catalonia, which has an economy about the size of Portugal's, threatens to derail the central government's plan to cut its budget deficit for this year by about a third.

The Catalan government on May 31 presented a budget to the regional parliament that included a deficit of 2.66 percent of the region's GDP, double the target set by Madrid.

The state of the regions' fiscal health has been an ongoing concern of the financial markets. Spain managed to meet its target of reducing the shortfall in its books last year to 9.2 percent from 11.1 percent as a result of the central government making up for the failure of the regions to achieve the goals set for them.

Regional funding has been a perennial bone of contention in Spain's semi-federal system, with Catalonia complaining that Madrid's failure to transfer funds it claims are owed to it being the main reason why it cannot meet the deficit-reduction target. In the face of widespread unrest Catalonia has been trying to cut down on healthcare and educational spending, and has pledged to slash investment spending by 40 percent this year.

After sweeping to victory in elections last month in Castilla-La Mancha, the Popular Party claimed that region was "bankrupt."

Catalonia's planned deficit overrun spotlights the central government's limited ability to enforce budgetary discipline at the regional level and complicates achieving the overall government sector budget deficit target of 6 percent of GDP this year," Moody's said.

The agency said that even if the central government does make good its threat to curb any new lending by Catalonia this year, this would exacerbate the region's problems by causing a further build-up of unpaid bills to suppliers.

Moody's said the central and regional governments need to forge a consensus on how to address the problems, or in the absence of this introduce mechanisms to ensure compliance with targets.