Spanish regions expect deterioration in 2009, 2010

The outlook for Spanish regions is negative due to increasing budget pressures stemming from decreasing tax revenues, Moody's Investors Service said in a new report. Combined with the regions' difficulties in reducing operating spending, this will translate into growing budget deficits and an accelerated recourse to debt in 2009 and 2010.
"Whilst the Spanish regions have entered this difficult period with debt levels generally lower than international peers in the same rating category, Moody's expects the regions' operating and debt performance to deteriorate significantly in 2009 and 2010," explained Sebastien Hay, a Moody’s Vice President and author of the report.
At the start of the crisis, the impact on the Spanish regions was limited to housing-related taxes, but the broadening of the recessionary forces to all sectors of the economy is expected to progressively affect all main sources of revenue for Spanish regions (VAT, PIT and state operating transfers). Combined with the fact that the regions' cost cutting efforts are hindered by the presence of some rigid core items, such as healthcare, Moody's expects a strong scissors effect and, in turn, almost nil operating balances in 2009. As a result, the regions' funding of their sizeable capital expenditure will mostly rely on new borrowings, leading to a rapid deterioration in debt performance.
"Given the high sensitivity of the regional budget to the state of the economy and the depressed outlook envisaged for 2010, there is a considerable chance that the Spanish regions will continue to suffer from significant revenue losses," said Hay.
Therefore, while the regions' budgets will benefit from the mitigating effects of the reform of the regional funding system, Moody's believes it is unlikely to lead to a material shift in the current negative trajectories next year. From a credit perspective, the regions need to demonstrate that there is a credible medium-term strategy to restore budgetary performance and financial flexibility.