Sunday, June 24, 2012

Testing times for Spain's regions

by Antonio Garcia Pascual and Michaela Seimen

Barclays Research June 2012

In this chapter we explain why the recent constitutional changes in Spain will have a positive medium-term impact on the fiscal position of the Spanish regions. We also discuss how the regions will manage to cope with their aggregate EUR140bn of debt and how new measures, such as the Fondo para la Financiación de Pago a Proveedores (FFPP), a government sponsored syndicated loan dedicated to pay suppliers, and Hispabonos, a joint funding platform, could help the regions to cope with the challenging economic and capital market environment.

The challenge continues

Spain has become (yet again) the focus of attention of financial markets. This has been the result of a large 2011 fiscal underperformance (mainly by the regions), a poorly managed upward revision to the 2012 deficit target, confirmation that the country re-entered recession in the first quarter, and a perception that the ECB’s recent injection of liquidity may have reached the limit of its effectiveness. More recently, market stress has escalated under the market perception that the clean-up of the banking sector is incomplete (despite intervention by the state in Bankia) and may result in larger fiscal costs than currently envisaged by the sovereign. However, since the new government took office in December 2011, and despite elevated market stress, it is also fair to say that the government has taken some bold steps to regain control of the fiscal performance of the regions.

To contain fiscal deficits, including the regions’, the parliament approved a new organic law on budgetary stability and financial sustainability of public administrations in May 2012. Of particular interest is that the law lays out the mechanisms of control for the central government in the event of fiscal deviations in the regions. Furthermore, the law also implements Article 135 of the Spanish Constitution (a new constitutional amendment approved by the parliament in September 2011), which legally enables the central government to intervene in a region that does not comply with the new fiscal stability framework. Among the various challenges confronting Spain, the ability to control the central government and regional deficits is one of the top priorities. The powers endowed to the central government under the new fiscal stability law are likely to be put to the test soon, in our view. Will those be enough to effectively limit future fiscal slippages and will the central government be able to control the regions?

Constitutional amendment of Article 135 & Fiscal Stability Law

In mid-September 2011, the Socialist government (now the opposition), with the support of the main opposition party (now in government), approved a “constitutional debt brake” consistent with the European new fiscal compact rules. The amendments are already enshrined in the Spanish constitution and include: 1) the principle of a structural balanced budget for the central government and the regions; local governments will also be required to run zero headline balances; 2) a ceiling for public debt of 60% of GDP; and 3) a change in the priority of government expenditures, whereby interest payments and amortisations of public debt will have the highest priority.

Technical details on the definition of the structural budget, including the “phase-in” period for the application of the rule and the specific mechanisms of adjustment in the event of deviations, are key features defined in the new, separate organic law (recently approved by the parliament) on budgetary stability and financial sustainability of public administrations. This new law has been drafted to be consistent with the agreements reached at the euro area level on the new “fiscal compact”. The law also automatically incorporates any future amendments to the European fiscal rules.

The new organic law defines the mechanisms available to the central government to rein in any fiscal slippages in the regions. Various mechanisms of ex-ante control, which are lacking so far, are now part of the new fiscal framework. These mechanisms include preapproval of regional budgets by the central government and the possibility for the central government to recommend or even impose fiscal consolidation measures on the regions. The regions also adopted new rules for the set-up of expenditure ceilings. These new elements of “ex-ante fiscal control” are now feasible legally for the central government (and certainly desirable) following the constitutional amendment approved in September.

Please see the Appendix in this section for details of the Fiscal Stability Law as well as new preventive and corrective mechanisms for central government control of the regions.

The 2012-13 fiscal targets are unnecessarily overambitious

Following a series of fiscal data revisions, the 2011 fiscal deficit currently stands at 8.9% of GDP, compared with a target of 6% of GDP. Of the overall 2.9pp slippage, the lion’s share corresponds largely to the regional budgets (about 70% of the slippage), with the rest of the deviation split between social security and central government. The regions with the largest slippages in terms of regional GDP were Castilla la Mancha, Valencia and Murcia, regions in which the boom-bust in real estate has been the most severe. However, in absolute terms, the largest contributors to the overall 2011 fiscal slippage were Valencia, followed by Catalunya and Andalucía (three of the largest four).

On 30 March, the Spanish government presented the 2012 budget for the central government, which includes measures worth EUR27.3bn (c.2.5% of GDP). When the government took office in December 2011, it announced a first round of fiscal consolidation measures totalling EUR15bn, including changes to personal income tax, capital gains, and property tax. The central government, social security, regions, and municipalities altogether will need to achieve a fiscal swing of 4.2% of GDP by reducing the public sector deficit to 5.3% of GDP in 2012.

Is the 2012 fiscal target achievable? The short answer is not under the existing measures. But we do not believe it is necessary to achieve fiscal solvency in the medium term. In our view a more moderate fiscal consolidation path, which ensures a fiscal swing of about 8% of GDP over the next 5-6 years would be sufficient to restore solvency. Specifically, for Spain, we think it is reasonable to assume that a 1% fiscal consolidation only produces an effective deficit reduction of 0.7% (see Spain: dealing with sudden reversals, 4 May 2012).

Using the government target, to achieve 4.2% of GDP consolidation in 2012 would require fiscal measures worth nearly 6% of GDP. Our more conservative estimate of a 3% of GDP consolidation in 2012 is based on adjustment measures worth slightly over 4% of GDP. There are three main differences between the more aggressive government adjustment path and ours. First, the government is probably using fiscal multipliers of smaller size than ours. We think this is because the government is considering that a large share of the expenditure cuts can be applied to activities (such as transfers) with a low fiscal multiplier. Second, we are assuming a larger GDP contraction than the government (Barclays -2.0%; Spanish government -1.7%). Third, we are also assuming slightly less fiscal adjustment in 2012 than the government. For example, we are excluding the EUR2.5bn expected revenues from a tax amnesty, which may or may not yield such revenues.

While the slippages are likely to occur across all the components of the general government, we still think that the largest fiscal risks remain in the regional fiscal consolidation targets. We estimate that, instead of the deficit target of 1.5% of GDP, a more likely outcome is in the range of 2.0% to 2.5% of GDP. The central government will have to help the regions by redefining the size of the welfare state that the Spanish economy can afford consistent with the targets of the regions. It will ultimately fall to the regions to implement the policies. Specifically, we believe significant cuts in health, education and social spending will be required. In fact, the government has proposed cuts on health and education spending cuts worth EUR10bn.

The social security fiscal target, which aims for a balanced budget, also seems quite challenging as the economic outlook has worsened relative to 2011. In 2011, social contributions fell c.3% and pension costs rose 4%; as a result, social security was -0.1% of GDP, versus the target of +0.4%. In 2012, a deficit larger than in 2011 seems likely (ie, a balanced budget strikes us as far-fetched) as pension spending continues to rise along with unemployment benefits, while social contributions are likely to continue falling.

Are there any safeguards against these risks?

First, the central government is backed by a brand new constitutional debt brake and a new organic law that sets expenditure-ceiling rules for all the sub-central government levels and allows the central government, if needed, to potentially “intervene in a region” and take away fiscal responsibilities. Also, the new draft law of “good governance” proposes that any local authority that fails to comply with the fiscal consolidation targets (ie, that fails to comply with the new constitutional amendment or the new organic law above mentioned) can be dismissed and be banned from running for public office for a period of up to 10 years. In practice, however, these brand new mechanisms of fiscal control have not yet been put to the test. We think that politically it would be very costly for the central government to revert the process of fiscal devolution by taking responsibilities away from any region, even if temporarily.

Second, the central government controls a large share of the regional taxes. Specifically, the central government controls the tax rates of the personal and corporate income tax (PIT and CIT), as well as the VAT. The fiscal revenues from these taxes are shared between the central government and the regions (50% each). Hence, any decision by the central government to increase the PIT, CIT and VAT rates has a direct impact on the fiscal revenue of the regions. In the approved 2012 budget and in the new 2012-15 stability and convergence programme, the government has approved (or proposed) changes to the corporate and personal income tax regime as well as an increase to indirect taxes, including a hike to the VAT rate in 2013 (the standard VAT rate is currently 18%, which is 3pp below the standard rate of Italy and 5pp below Ireland, Portugal and Greece).

Third, the government is taking stock of all state-owned real estate assets and planning more active management of these assets to reduce expenditures and privatise the more marketable assets to reduce public debt. It has set up a public sector entity to coordinate the disposal of these assets. While the government does have an inventory of its real estate assets, it has not yet indicated the assets it is planning to privatise or the possible valuation.

Finally, the government will target further structural reforms, in addition to the already approved labour market reform. New reforms will be aimed at enhancing competitiveness by reducing production costs and improving market flexibility, and will cover the energy sector, market integration, housing rental market, and innovation and R&D activities. With the presentation of 2012-14 regional budget plans on 17 May 2012, the first part of the fiscal planning is finally complete. We believe the targets set for the regions are overly ambitious.

Although we appreciate that there are segments that would need more comprehensive cuts, we nevertheless believe the restructuring of public economies is a rather longer-term project and market participants could be mislead by more limited short-term achievements. In the short term, the government will also need to focus on the funding of the regions. With strong risk aversion in the market and ongoing concerns regarding peripheral economies, we believe market access for Spanish regions will be rather limited in the near and medium term. As such, the government already tried to ease the burden by establishing a support fund to finance debt the regions had accumulated with its suppliers (Fondo para la Financiacion de Pago a Proveedores, more on this below).

Furthermore, we understand that the government is working on establishing so-called ‘Hispabonos’ to support the capital market funding of the regions. While the details of the Hispabonos have not been revealed, we think it is likely that the new instruments will: 1) carry a sovereign guarantee; 2) be responsible for (most of) the funding of the regions; 3) enhance liquidity relative to each region tapping the market separately; and 4) reduce the effective funding cost for most of the regions (albeit potentially at the expense of a higher funding cost for the central government).

Fondo para la Financiación de Pago a Proveedores

In 2011, we referred in our AAA Handbook overview of the Spanish sub-sovereign market to the problem of ‘hidden debts’, particularly for suppliers receiving delayed payments. Such payments are recorded in accounts payable and by the Bank of Spain; as such, an increase of these amounts was noted in recent years. Although such a development is not unexpected, as these accounts tend to behave pro-cyclically, delays in payments were partly used to bridge periods of a more difficult funding climate. However, the economy and SMEs in particular are constrained by such delays. To address this problem, the Spanish government has set up a fund – the Fondo para la Financiacion de Pago a Proveedores – to pay the mounting debt local and regional authorities (territorial administrations) have to their suppliers. The fund – effectively an intermediary between financers and territorial administrations – has been created through a subscribed syndicated loan totalling EUR30bn at the time of writing, and can be increased to EUR35bn, which is the current estimate of excess accounts payable to suppliers according to publications by the Ministry of Finance and Public Administration (Treasury) and the Ministry of Economy and Competitiveness. Repayments are set to commence on 31 May this year for local authorities, and 30 June for regional authorities, and will be made directly from the fund to the suppliers approved for repayment.

The fund, FFPP, will grant loans to territorial administrations for up to 10 years, with a 2- year grace period; in turn, these administrations will have to come up with a sustainable long-term adjustment plan guaranteeing the repayment of future loans. This adjustment plan will be supervised by the Ministry of Finance and Public Administrations (ie, Treasury).

The fund is set up through a syndicated loan, the biggest in Spanish history, made by 26 Spanish financial institutions, and will have a 5-year tenor (with a 2-year grace period). It will be guaranteed by the Treasury, which will assume the transition of the 5-year syndicated loan to the 10-year loan to the territorial authorities. The Treasury, in turn, will have a counter-guarantee against the local and regional revenues (Participación en los Ingresos del Estado). The loan will be made at 3-month Euribor plus a premium added for market conditions, which will make the loan cost about 5.9%.

Spain hopes this operation will inject liquidity equivalent to 3% GDP into the economy, which is respectively expected to increase by 0.4% between 2012 and 2013. The operation will mainly benefit small and medium-sized enterprises, and Spain is hoping to generate a further 100,000- 130,000 new jobs.

Funding outlook – a tricky business

In their recent 2012-14 Budget planning announcements, the regions also presented an overview of the quarterly maturity structures of their debt in 2012 (see Figure 3). However, due to short-term extensions, private placements and rolling bank loans, it is rather difficult to follow an exact debt profile for each region.

Furthermore, the newly established support fund to pay suppliers, plus additional ICO liquidity lines, shifted the funding needs of the regions slightly.

In the last 2 years retail bond issuance became an interesting alternative funding tool for some regions, as to being able to place larger bonds in the market. However, funding costs for this instrument are rather uneconomical; furthermore, it is our understanding that this funding source could come to a sudden stop, as more recently some regions have been downgraded to non-investment grade by some rating agencies, which would undermine the region’s ability to use the retail market segment.

As of year-end 2011, the Bank of Spain published the following overview on the short- and longer-term funding of Spanish regions (Figure 6).

We do not believe the funding pressure for the regions will decrease substantially in the near term, despite the efforts to meet the 1.5%-deficit agreement. In our view, this target is very ambitious and could lead to misjudgements regarding the progress regions will have to make to get their budgets and deficits under control. Instead, we tend to review the progress of the regions on a more gradual and broader view. In the meantime, we will focus on the implementation of the government’s control measures and systems and the respective triggers for penalties on regions that do not follow austerity measures on an ongoing basis.

However, in the long term, the success of the penalty/intervention structure is also dependent on central government political backing in the region. As long as the PP - People’s Party - holds a majority in the regions, changes and control mechanisms and penalty structures are more likely to be enforced. However, if this situation should change In the future, approvals for interventions could become more difficult.


Hispabonos, although not in existence yet, will be bonds issued by the autonomous regions that the state intends to issue on a state-wide level to increase liquidity and lower the cost of debt. Basically, it is too costly for the autonomous regions to issue and service debt; as a result, the government might be obliged to intervene when the autonomous regions cannot pay.

The Spanish regions (some more than others) are struggling with large refinancing needs of c.EUR50bn this year. Given several Spanish regional authorities already have large amounts of debt outstanding (c.13% of GDP), it is more difficult for these to enter the market at reasonable levels. In addition, several regions have recently been downgraded to non-investment grade levels by Moody’s. For example, Catalunya alone has more then EUR41bn of debt outstanding, followed by Valencia with c.EUR20bn and Madrid with c.EUR15bn (see Figure 8). Valencia had to refinance a EUR500mn loan at a cost of 7% with a 6-month tenor in May this year, according to Bloomberg data, which is unsustainable even in the medium term.

For some regions, a recent source of funding has been larger retail bond issuance. Catalunya is one such region, issuing retail bonds, with severe additional costs attached. According to media reports, on top of paying 2.85% more in coupon than treasury securities with similar maturities, which were offering 1.94% at the time, the Generalitat of Catalunya also had to incur a further 3% in insurance costs and 2% as a commission to the individual banks selling the bonds, taking the total cost of the issue close to 10%. It is our understanding that this is not unusual as banks charge higher prices to insure and promote products that are difficult to commercialise.

Given the restrictions and risk aversion Spanish issuers face, we believe the plan to provide a joint issuance platform for the regions would be beneficial because there are several points the potential Hispabono could address:

- The issues would more likely be placed with institutional investors (and made repo-able at the ECB), which would be cheaper than trying to place them with private clients, as in the previously mentioned example of the retail bond issuance.

- Furthermore, the issues would also be larger in size, thus making them more liquid, as opposed to the individual, smaller sizes issued when needed by the regional authorities.

- According to a Reuters report, the financing costs incurred by regional authorities could be reduced more than EUR1bn per year by issuing Hispabonos. This represents an important 2% reduction in financing costs in 2012.

Nevertheless, the concept of Hispabonos also faces some opposition. Regional authorities that have smaller deficits, a comparatively small stock of outstanding debt and benefit from higher credit ratings are more reserved about pooling funding and thus facing a higher funding cost. Also, some market participants raised concerns that easier and more liquid market access could undermine current efforts to reduce spending.

The establishment of Hispabonos is being discussed at a government level, but no details regarding the format or structure of such bonds have been made public. From various media reports, we understand that different proposals are currently reviewed. In our view, an important feature would be a potential guarantee structure by the state, which is not necessarily envisaged however. Reuters, Cincodias and el Confidencial, among others reported on developments in regard to Hispabonos, with some articles mentioning that the state will guarantee the bond, while others merely say it will be backed by the state, which in our opinion is more akin to an implied guarantee as opposed to the full faith and credit of the Spanish government. In our view, since the regions have legal independence, we find it unlikely that Hispabonos would be backed by a full guarantee of the Spanish government. However, given the current sensitivity in the market, we believe correlation risk between Spain and any Spanish issuer is extremely high. As such, any failure in the sub-sovereign or agency or banking sector, for example, would have immediate implications for the state.

However, the government has passed a constitutional amendment and an organic law to have better control of the fiscal performance of the regions and repeatedly has stated in public that it will not let any region default – which is a very strong implicit guarantee in our view. For example, Treasury Minister Montoro was recently cited in el Confidencial, saying that the state would always be there when an autonomous region would require help, although we note this does not alleviate any region from its responsibility to control its budgets and reduce the deficit. The new government already proved its commitment to the regions, when it helped in December, according to Bloomberg, the region of Valencia to make a EUR123mn payment to Deutsche Bank. The Spanish treasury gave a verbal guarantee to an unidentified lender in order to advance the funds the regional government needed to make the payment.

From a timing perspective, we expect a decision on Hispabonos in the near future, as funding requirements for regions would need to be addressed at the latest in Q3 12. Bloomberg reported on 1 June 2012 that Spain is working on a mechanism to help its regions finance themselves in the financial markets and will publish details of the programme the following week. The mechanism will mean changes to Spanish law and impose stricter conditions on regions while leaving them responsible for their own debts, Budget Minister Cristobal Montoro said at a press conference in Madrid. Full implementation and legal foundation could be considerably lengthier though, as a financing mechanism must be set up and most likely reviewed by the rating agencies before any significant issuance takes place.

Either way, based on recent comments by government members cited in the media, we are confident that the establishment of Hispabonos will be addressed in the near future and that this new instrument will be implemented as an economical solution to finance the Spanish regions.

For an indication of pricing and investor acceptance in the market, we believe a comparison with other Spanish government-related debt is sensible. In the past, there has been a relatively widely diversified investor base in Spanish government guaranteed debt, such as ICO, FROB or FADE. However, with increased concerns regarding European peripheral issuers, international investor interest in these markets has become rather subdued and has been nearly completely replaced by a national investor base.

However, investors have focussed on the regions for a long time. Despite missing explicit guarantee structures, but more or less being based on the assumed large correlation risk with the Spanish sovereign, the higher spreads currently attract renewed investor interest in this segment. With the fractured market currently and a separate risk assessment necessary for each region due to complex and partially unclear data, some investors regard current spreads and the remaining insecurity about missing guarantee structures as insufficient to provide relative value in sub-sovereign investments.

In this respect, though, Hispabonos could add value by replacing a complex individual risk assessment for each region with a guarantee structure. Nevertheless, we expect investors to demand a pick up over Spanish sovereign bond issuance and given our expectation of a more implicit guarantee structure, the pick up also has to be considered to be currently slightly above government guaranteed debt.

With the introduction of a new issuance instrument, we expect maturity levels of new bonds to be skewed towards the shorter end of the maturity spectrum. As such, we expect bonds with a maturity of three years to most likely trade with an additional spread pick-up to fully guaranteed debt (eg, ICO currently is priced about 60bp over government debt). At first glance, this might appear to be an expensive option. However, with the limited liquidity and market access of Spanish regions, spreads of Spanish regional debt have been about 400bp over Spanish government debt.

Given the difference in credit quality of the regions based on the ratings and the indebtedness, we do not believe that the funds would be distributed at equal costs to the regions. As such, we would envisage a system, where funds raised via such an instrument would be distributed at a cost linked to the respective credit quality of the region.


Institutional and political background

Spain is one of the most decentralized countries in the euro area (if not the most). In the 1980s, sub-national governments were responsible for c.15% of the public expenditure; in 2010, regions accounted for c.50% of the expenditures. The 1978 Constitution grants the regions competences in many areas including education, health, public works in their territory and the environment. As a result of the fiscal devolution process, the central government currently controls less than 30% of public expenditure (excluding social security and debt service).

Politically, the Kingdom of Spain is divided into 17 autonomous communities and two autonomous cities that are located in Northern Africa: Ceuta and Melilla. Geographically, with 18.6% of the total landmass, Castilla y León is the largest autonomous community, followed by Andalusia (17.2%) and Castilla La Mancha (15.7%). In terms of population, however, with c.17.8% (8.1mn) of the total 44.1mn inhabitants, Andalusia is clearly the largest autonomous community, followed by Catalonia (16.0%), Madrid (13.6%) and Valencia (10.9%).

“No bailout rule”

The Spanish budgetary stability law (Ley de Estabilidad Presupuestaria – LEP), which was implemented in 2007, specifically states there will not be any bailout procedures for the Spanish autonomous communities.

In the Real Decreto Legislativo 2/2007 of 31 December 2007, it is explicitly stated that “the Spanish central government will neither assume nor be responsible for the commitments of autonomous communities, local entities or those related or depending on these, without affecting mutual financial guarantees for the joint realisation of specific projects”5. As a result of this specific no-bailout clause, rating agencies understand the probability for timely sovereign support is relatively low6. Still, despite limiting federal support in the case of (financial) distress, in our view, the no-bailout clause does not exclude financial help in the form of specific transfers to autonomous communities before a bankruptcy emerges. In

fact, taking into consideration the legal barriers to provide (federal) help in the case of distress, we believe there is a high probability the central government (and other autonomous communities) would make the respective funds required to turn down an event of default available before any such situation arises.

Furthermore, we believe that in case of distress, the Financial and Fiscal Policy Council (FFPC) that represents Spain’s autonomous communities could arrange for emergency funding to weather any further adverse developments. Clearly, bearing in mind the potential spill-over effects, the default of a single autonomous community cannot be in the interest of the other autonomous communities.

Regulatory issues

In Circular 5/1993 from March 1993, Banco de España (BdE) provides a classification of the respective risk weightings (RW) applicable to debt issued by Spanish autonomous communities. Among other instruments, debt issued by the autonomous communities and local entities, provided the issues are authorised by the state (“Deuda pública emitida por las Comunidades Autónomas y las Entidades locales, cuando las emisiones estén autorizadas por el Estado”), benefit from an RW of zero. In principle, all debt (loans and bonds) issued on behalf of the autonomous communities are authorised by the state with RW of zero. Yet, in the case of municipalities, authorisation is usually only sought for bonds. All other debt issued thus falls outside the scope of the above clause and becomes subject to an RW of 20% (“Grupo con ponderacion del 20%: activos, […] que representen créditos frente a las Comunidades Autónomas y frente a las Entidades locales españolas”. Bonds issued by the Spanish autonomous communities generally fall into the ECB’s liquidity class category two. Depending on the remaining term to maturity, the applicable haircut applied by the ECB ranges between 1% and 7.5%.

Key elements of the draft Fiscal Stability Law

1. A debt brake rule: Public debt cannot exceed 60% of GDP, but there will be a transition period until 2020. During this period, a path to reducing the budgetary imbalances will be devised until the public debt ceiling of 60% of GDP is achieved. In particular, public debt will be reduced as long as the national economy is experiencing real positive growth. Furthermore, when a growth rate of 2% is reached, or if net employment is generated in annual terms, the debt ratio shall be reduced annually by a minimum of 2pp of GDP (the structural deficit of the overall public sector must be reduced by an annual average of 0.8% of national GDP).

2. Balanced structural budget rule: All public administrations (including the regions) will present a balanced or surplus budget. No administration may incur a structural deficit. A structural deficit may only occur in exceptional situations (natural disasters, economic recession or extraordinary emergency situations). The EU recommendations on the stability programme will be taken into account to set the stability and public debt targets.

3. An expenditure ceiling: All public administrations must approve an expenditure ceiling in keeping with the stability target and the expenditure rule. Public sector expenditures may not rise above the GDP growth rate, in accordance with European regulations.

4. Priority of debt service rule: Servicing the public debt will take absolute priority above all other expenses, as established in the constitution.

5. Control mechanisms and sanctions: Failure to comply with these objectives by the regions will result in the requirement to present an economic/financial plan that will correct the fiscal slippage within one year. This plan must explain the reasons for the deviation and the measures that will enable the administration to get back within the limits. Fulfilment of the objectives will be taken into account for authorising debt issuance, granting subsidies and signing agreements. In the event of non-compliance with the plan, the administration responsible will have to automatically approve the non-availability of credit that will ensure the established objective is met.

Any sanctions imposed on Spain in relation to stability will be assumed by the responsible administration. The law also transposes the EU corrective mechanisms. In the event that an economic/financial plan is not fulfilled, the administration (central or regional) that has failed to fulfil the plan must make a deposit of 0.2% of its nominal GDP, which after six months may become a penalty if the failure is repeated. Moreover, after nine months, the central government may send a delegation to assess the economic and budgetary situation of the administration in question.

More importantly, the government has clearly indicated that, according with the new constitutional amendment and the new organic law, failure to comply with the fiscal stability law could trigger intervention in a region. The central government would take control of the budget of the region until fiscal stability is restored.

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