The new leader of Castilla La Mancha said Monday that the Spanish region has a budget deficit more than twice as large as previously thought, raising new concerns over the true state of regional finances and helping to send Spain's risk premium to new historic highs.
Castilla La Mancha President Maria Dolores de Cospedal said her government will present Tuesday the first results of the audit she announced after being elected in nationwide regional and municipal elections on May 22.
"With the debts we've found unpaid as of June 30, the deficit is much higher than we were told," Ms. Cospedal said in an interview with Onda Cero radio station. "Tomorrow we will see the exact figure... but it will likely be much higher than 4%," added Ms. Cospedal, who is also the No. 2 national official of the opposition Popular Party.
The outgoing regional government of Socialist José Maria Barreda had said Castilla La Mancha had a budget deficit equal to 1.78% of local gross domestic product in April, well in excess of the 1.3%-of-GDP limit for 2011 set by the central government in Madrid for each of Spain's 17 regions.
Roberto Ruiz, UBS strategist in Madrid, said the news on Castilla La Mancha "fanned the flames" of worries over Spanish finances. Largely the result of increased investor unease over Europe's inability to solve Greece's financial problems, Spanish and Italian risk premiums—as measured by the spread of their 10-year government bond yields over the German benchmark—soared to new record highs Monday.
The yield premium investors demanded to hold Spanish paper surpassed three percentage points for the first time since the creation of the euro in 1999.
Spanish regions control over one third of spending and are essential to the country's plans to slash an overall public-sector deficit of just over 9% of GDP in 2010 to 3% in 2013. But so far they have made little progress in budget overhauls mandated by the central government in Madrid.
In addition, since a change in government in the wealthy but highly indebted region of Catalonia last year uncovered a much larger deficit than was previously acknowledged, the accuracy of regional accounts have been under suspicion.
The May 22 elections unseated the ruling Socialist Party of Prime Minister José Luis Rodríguez Zapatero—undermined by a deep economic crisis—from six of the seven regions it governed. Ms. Cospedal and other incoming Popular Party leaders had promised to audit the accounts of the local governments.
Castilla La Mancha, which reported a 2010 budget deficit of 6.5% of GDP, the highest of all Spanish regions, was already known to have deep financial problems. And it is a relatively small region that accounts for just 3.4% of national GDP. Still, its revelation of a worse-than-expected deficit "shows a dangerous trend," Mr. Ruiz said.
Ms. Cospedal said she had sent a letter to Spanish Finance Minister Elena Salgado, asking her for an urgent meeting to discuss the "worrying state of Castilla La Mancha's finances."
The central government is due to call a meeting with all regions to discuss deficit-cutting plans by the end of this month.
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