Weekend elections that threaten to drive Spain's ruling Socialist party from power in several regions and cities also promise a potentially nasty surprise: the revelation of piles of undisclosed debt in local governments that could undercut the country's drive to avoid an international bailout.
Five months ago, a government change in Spain's Catalonia region revealed a budget deficit more than twice as big as previously reported. Now, a growing chorus of economists, local politicians and business leaders say that new governments are likely to discover, as Catalonia did, piles of "hidden debt" owed to health clinics and other suppliers.
(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)
Economists, analysts and anecdotal reports from companies that supply local governments suggest there is widespread, unrecorded debt among once-free-spending local governments. Some companies are complaining that fiscally frail administrations are pressuring them to do business off the books and not immediately bill for goods and services, said Fernando Eguidazu, vice president of the Circulo de Empresarios business lobby group in Madrid.
Such bills could add tens of billions of euros to the official debt figures reported by local and regional governments. If such skeletons come out of the closet in coming weeks, Spain's cost of funding could continue to rise--throwing the country back into the limelight after it has struggled to demonstrate it doesn't need to be bailed out like Greece, Ireland and Portugal.
"Investors are worried about the regions, given that there has a been precedent in Spain and other countries of debt not being recorded properly," said Luigi Speranza, a BNP Paribas economist.
Sunday's elections, which will be held in 13 of the country's 17 regions and its more than 8,000 municipalities, threaten to be hard on Prime Minister Jose Luis Rodriguez Zapatero's Socialists. Polls show Socialist-led governments could be unseated in Castilla-La Mancha, the Balearic Islands, Asturias and Extremadura regions. Undermined by a 21% unemployment rate and a perceived slowness in reacting to the country's economic crisis, the Socialists could also lose control of the municipal governments of Barcelona and Seville, the country's second- and third-largest cities.
The social fallout from the poor economic conditions is evident in Spain this week as waves of protests swept the country. Young people took to main squares in Madrid, Barcelona and Valencia on Thursday to protest unemployment among those in their 20s and 30s, which has reached 50% in some areas, and the government's austerity program. Demonstrators are hoping their ranks will swell over the weekend.
Nearly a year ahead of March 2012 Spanish national elections, a poll last month by the state-owned Center of Sociological Investigations, or CIS, forecast the opposition Popular Party could capture 43.8% of the vote, while the Socialists could get 33.4%.
Spanish Finance Minister Elena Salgado has told journalists there are no "hidden deficits" on the accounts of Spain's regions. Spain lately has steadied--if not dismissed--concerns about its finances by slashing its budget deficit to 9.3% of gross domestic product in 2010 from 11% of GDP in 2009.
But most of the reduction was thanks to central-government cuts. Regional and municipal governments, which piled on debt during the economic boom years that followed Spain's adoption of the euro in 1999, control half of spending in Spain, and have so far made little progress on this front.
They also got into the habit of paying their suppliers late to free up funds for other spending projects. According to Spanish central bank data, regional and municipal governments had around EUR21 billion ($29.9 billion) in unpaid invoices on their books in 2010, equal to about 13% of current outstanding debt and nearly double the amount in 2003.
The "hidden debt" problem first popped up in Catalonia after elections in the fall that resulted in moderate Catalan nationalists unseating a Socialist-led coalition. In December, the central finance ministry said the region's debt-to-regional-GDP ratio was 1.7% as of the third quarter. The old government, in an outgoing report, later disclosed the full-year deficit could be as high as 3.3%.
The new government found that the 2010 deficit was actually 3.8%, thanks to lower-than-anticipated tax revenues as well as millions in unrecorded late payments to suppliers. Among them: EUR852 million in unpaid bills to health-care providers such as hospitals, according to the current government's spokeswoman.
In response, the new Catalonian government drafted a draconian 2011 budget that foresees a 10% cut in expenditures and includes downsizing of public-sector companies and cut backs in health services. Now, the fear is that the Catalonia phenomenon will be repeated.
Following the Catalonian elections, reports surfaced in Spanish newspapers that the government of the east-coast region of Valencia had EUR1.3 billion of unpaid bills to health-care suppliers that "were put in a drawer" and not counted as part of that region's 2010 deficit. Valencia officials declined to comment on the reports.
"If [new governments] want to force changes, they are going to have recognize the debt," said Luis Garicano, professor of economics and strategy at the London School of Economics.
Mr. Garicano, who worked on a 2009 study on the Spanish health-care system with McKinsey & Co., estimates that unrecorded payments to providers of health products and equipment may be just under EUR10 billion.
While that amount would add only about 1% to the country's debt-to-GDP ratio, such a widespread payment backlog, which Mr. Garicano says often reaches 600 days of delay, "is a massive problem to a whole range of businesses," he said, and would crimp the economic growth Spain urgently needs.
Regional and municipal governments are benefiting from European Union rules that allow them to keep much of the debt of public-sector companies, such as utilities, off their books. Lorenzo Bernaldo de Quiros, a Madrid economist, calculates that around EUR26.4 billion of debt isn't being recorded, even though local governments are ultimately on the hook for it.
Hidden-debt concerns now play a central role in campaigning in regions like Castilla-La Mancha, where the Socialist party risks losing its 30-year hold on power. In an April survey, the Center of Sociological Investigations forecast the PP will win 46.3% of the vote to the Socialists' 45%.
According to the PP and local business leaders, the region hasn't booked 90,000 unpaid invoices of around EUR1 billion. A local businessman said a lengthy payment authorization process lets regional authorities delay recording invoices they receive, that they are booked as expenses only when the region is nearly ready to make payment. Regional government officials wouldn't comment on the claim.
In an interview, Maria Dolores de Cospedal, the PP's candidate to be the next president of Castilla-La Mancha, predicted a new regime would find hidden debts and promised to clean them up. "It's time to face this problem," she said, adding the first thing she will do if elected is commission an audit of Castilla-La Mancha's accounts. She also says she will close more than half of the region's 95 public-sector companies and privatize the local television station, which she said loses EUR70 million a year.
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