Spain's central government may impose budget curbs on regional authorities as soon as next month in return for extending them credit lines, a government source said on Monday, an effort to placate markets as the cost of borrowing hits dangerous levels.
Spanish 10-year government bond yields broke through the 6% mark on Monday for the first time since the beginning of December. Spain has acknowledged that it has probably tipped into its second recession since 2009.
The conservative government says it is committed to making major budget cuts. But concern is growing on financial markets that the recession will make it impossible to meet deficit targets and that Spain will have to seek some kind of an international bailout, like Greece, Ireland and Portugal.
The 17 autonomous regions account for around half of public spending. They are expected to lower their own deficits to 1.5% of GDP by the end of the year from 2.9%.
The 1970's Constitution gave the regions a lot of power over their own budgets, but their inability to rein in spending after a decade-long country-wide property boom has spooked international investors.
Regions have to present their plans to make savings of around 15 billion euros ($19.62 billion) in the first two weeks of May and the government could take action on plans not meeting requirements almost immediately, the source said.
Some regions have failed to pay public service contractors for months. The Spanish central government has offered credits to help pay those debts, on the condition that regions abide by their deficit goals.
ECONOMIC SLIP
Soaring bond yields raise worries the government's borrowing costs could quickly reach unaffordable levels unless the European Central Bank resumes buying government bonds in a programme which has helped to keep yields down in recent months.
Official data on total economic output in the first three months of this year is not due until April 30. However, Economy Minister Luis de Guindos said gross domestic product was likely to have fallen a similar amount to the October-December period of 2011 when the economy shrank 0.3% quarter-on-quarter.
Two successive quarters of falling GDP mark a recession, which has been widely expected in Spain, but de Guindos said the downturn may not be as bad as first thought.
Spain's economy has been in shrinking or stagnating since a property bubble burst in 2008. With house prices still sliding, the survival of some banks and the ability of the new government to control its finances are in doubt.
Lower Euribor interest rates, used to set most Spanish mortgages, had given some relief to cash-strapped consumers in a country plagued by massive unemployment.
The conservatives, who won elections last November on dissatisfaction with the previous Socialist government's handling of the economic crisis, have passed a number of measures to reduce one of the euro zone's highest deficits.
However, faith in Prime Minister Mariano Rajoy's ability to work within euro zone budget limits has been tested since he unilaterally eased the 2012 deficit target at the beginning of March, prompting debt risk premiums to rise sharply.
