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Spain Revises 2011 Deficit To 8.9% Of GDP

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05/18/2012 | 11:35pm CEST

--Spain revises 2011 budget deficit to 8.9% of GDP from 8.5%

--Maintains 2012 deficit target of 5.3%

--Regional government debt behind deficit revision

MADRID -- Spain's Budget Ministry said Friday it has revised its budget-deficit estimates for last year to a wider 8.9% of gross domestic product as a result of higher debt reported by several regional governments.

In a press release, the ministry said it is maintaining its budget-deficit target of 5.3% of GDP for this year.

Spain initially reported a budget deficit equal to 8.5% of GDP for 2011, far in excess of the 6%-of-GDP target it had committed to with the European Union and international investors. Much of the overrun was caused by region-specific debts.

Spain's regions have moved to the center of the country's fiscal crisis. They control almost half of spending, including socially sensitive areas like health care and education, and have a long history of budget overruns. They now are grappling with plummeting tax revenue in a weak economy after the collapse of a tax-rich housing boom and have encountered increasing difficulties to obtain financing from international capital markets, and more recently, even from local banks.

The revised budget-deficit estimates released Friday are linked mostly to higher debt reported by the regional governments of Madrid, Valencia, Andalusia and Castille-Leon.

The Budget Ministry said that the higher level of debt was uncovered by a program the central government launched this year to help the regions pay an estimated 35 billion euros ($44.7 billion) in overdue bills to their suppliers. In exchange for credit lines to help them to pay the bills, the government required a full accounting of their outstanding debts. Many business leaders and economists long had suspected there were hidden debts within Spain's regions.

Under pressure from European authorities to slash spending, Spain also has pledged to cut its deficit to the 3%-of-GDP limit for euro-zone countries in 2013. The central government has pledged budget cuts worth EUR27 billion this year, and the regions have presented measures worth another EUR18 billion. The spending cuts and tax hikes are weighing on a local economy already struggling with an unemployment rate above 24%, the highest in the euro zone. Spain also has joined seven other euro-zone nations in recession, according to data released earlier this week.

On Thursday, Moody's Investor Service lowered its rating on four Spanish regions, citing their poor fiscal performance and the low probability that the regional governments will be able to meet this year's deficit target set by the central government. Two of them, Catalonia and Murcia, were dropped to junk-level territory.

Investor concerns over the ability of the central government in Madrid to rein in the regions has contributed to the government's spiraling borrowing costs in recent months. The EU recently forecast Spain will miss its budget-deficit targets for this year and next by a wide margin in the midst of a deep downturn, raising new doubts about the bloc's prescription of austerity to overhaul the economies of its fiscally frail members. The EU forecast a budget deficit equal to 6.4% of GDP in 2012 and a deficit equal to 6.3% of GDP in 2013.

-By Santiago Perez, Dow Jones Newswires, +34 618 528 681; [email protected]

--Jonathan House contributed to this article.

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