Several Spanish regions are rebelling against the central government's decision to cap their debt, raising fresh doubts on Wednesday over its ability to meet deficit targets agreed with Brussels.
Regional finance chiefs at a meeting with the national treasury agreed late Tuesday to an overall debt ceiling for the 17 regions of 15.1 percent of output in 2012 and 16 percent in 2013.
But four regions, including two of the largest, Catalonia and Andalucia, refused to accept the central government's clampdown on their finances.
Catalonia, Spain's richest region with an economy equal in size to Portugal's, boycotted the meeting altogether while the finance chief of Andalucia, the country's most populous, walked out of the gathering.
Two smaller regions, Asturias and the Canary Islands, voted against the targets at the meeting.
"The lack of internal cohesion is highly damaging to the international credibility of Spain at a key moment for its economy and that of the eurozone," Barcelona-based daily La Vanguardia wrote in an editorial Wednesday.
Spain has slashed spending and raised taxes as it seeks to convince markets that it will not need a full bailout, on top of a 100 billion euro ($123 billion) credit line from the EU agreed in June for its stricken banks.
The regional governments, which fund education and healthcare, are crucial to Prime Minister Mariano Rajoy's effort to bring the country's overall public deficit down to just below a EU limit of 3.0 percent of output by 2014.
They accounted for two-thirds of Spain's deficit slippage last year, when the country missed its target of keeping the deficit to 6.0 percent of economic output and instead let it slide to 8.9 percent.
"The political dynamics between the central government and the regions are likely to be important in ensuring the overall success of the Spanish adjustment efforts," Citigroup wrote in a research note published Wednesday.
The central government set a debt limit for Catalonia in 2012 of 22.81 percent of output and of 23.6 percent in 2013, with Andalucia on 12.07 percent and 13.2 percent.
Meeting Andalucia's debt ceiling for 2013 would require further spending cuts of three billion euros, the president of Andalucia, Jose Antonio Grinan, told a news conference in Seville.
"It is impossible unless we shut down hospitals and schools," he said.
But Budget Minister Cristobal Montoro said the regions had no choice but to respect the debt limits set for them.
"We are talking about the application of European standards. We are demanding of the regions what Europe demands of us," he said.
The central government has the power to withhold the transfer of money to undisciplined regions but punishing regions would be a risky strategy since some are on the brink of default.
Catalonia said Tuesday it could not afford to make its grant payments for the month of July to non-profit hospitals, old age homes and other social services agencies that provide services for the northeastern region.
Last week, it said it was considering tapping a new central government fund worth up to 18 billion euros ($22 billion) set up to help regional governments in difficulty.
The row between the central government and the regions comes as Spain's allies are looking for Germany to agree to the European Central Bank opening its purse strings and buying Spanish and Italian debt at a time when the two nations are struggling to finance themselves on international markets.
"Germany is willing to help Spain to reduce the market pressure on its debt but in exchange it wants more savings, mainly in education and health," Madrid brokerage Renta4 said in a research note.