Quarrels over who bears the brunt of cuts worth more than 10percent of Spain's annual gross domestic product threaten PrimeMinister Mariano Rajoy's plan to tackle the euro area'sthird-largest deficit as a second bailout looms.

A seven-day rally that has driven Spain's 10-year yield to 6.1percent at 10:55 a.m. in Madrid from 6.9 percent may falter assquabbles between the government, regions and towns about spendingand tax receipt allocations hobble deficit reduction. Spain willmiss its targets for budget gaps of 6.3 percent of GDP this yearand 4.5 percent in 2013 as the nation's recession worsens,according to the median forecast of 12 analysts surveyed byBloomberg News.

“As budget deficit targets look unachievable, the risk of apotential full bailout of the Spanish economy is still there,”Jaime Becerril and Axel J. Finsterbusch, analysts at JPMorgan Chase& Co. in London, wrote in a note. “Further measures must betaken to restore market confidence.”

Five regions will boycott rules depriving illegal immigrants offree health care, while towns such as Hospital de Orbigo andCartagena are trying to alleviate the austerity burden on families,one by paying for school books, the other by compensating civilservants for wage cuts.

Spain signed off July 24 on as much as 100 billion euros ($125billion) of aid from European rescue funds to shore up banksburdened with bad loans. Rajoy, who broke his first election pledgeafter nine days of office, is weighing a second bailout as hestruggles to implement his fourth round of tax increases andspending cuts in eight months to preserve market access for theeuro area's fourth-biggest economy.

Town halls are asking to share regions' incomes and suggestingthat responsibilities including paying for school maintenance mightbe reassigned. Madrid has discussed cutting back on its civicduties while criticizing that 83 percent of the taxes it collectsgo to poorer regions. Valencia, the second-most indebted region,said its debt load would be 60 percent smaller if it had receivedfunding in proportion to its population.

“The problem is that each one is trying to save time by blamingsomeone else,” said Jose Antonio Herce, a public administrationconsultant in Madrid with Analistas Financieros Internacionales.“No one wants to tell voters they have to meet the targets with theresources they have because there simply isn't more money.”

Spending Limits

Economists are predicting overspending may remain close to 8.9percent of GDP for a second year. The central government exceededin June its limit for the whole year as it bailed out the regions,town halls and the welfare system amid the second recession since2009.

Rajoy has assigned 73 percent of the nation's 2012deficit-reduction effort on the regions and municipalities, forcingthem to reduce shortfalls by respectively more than half and aquarter while continuing to fund public services such as healthcare and education amid a tax-receipts drought.

“It is difficult because the measures that need to be taken arevery harsh,” said Leandro Esteban, a spokesman for Castilla-LaMancha, which had the highest regional deficit in 2011 at 6.07percent of GDP. About 40 percent of temporary civil servants willbe dismissed to cope with the previous government's mismanagement,he said, citing the construction of an airport where grass nowcovers an unused runway.

The Socialist president of the northern Basque Country PatxiLopez today told Cadena Ser radio he is moving local electionsinitially scheduled for March 2013 forward to Oct. 21 in order forBasques to choose how to deal with the crisis. “There is a lot ofuncertainty about the future and our economic model is whatcounts,” he said.

“The efforts demanded of the different levels of government areunfair,” the Economy Department of Catalonia, Spain's most indebtedregion and the largest contributor to its economy, said in ane-mailed response to questions. The central government hastightened regions' goals while Spain's were loosened and its owndeficit cuts are a quarter of the regions', according to thee-mail.

The 17 semi-autonomous governments won't keep their economicpromises this year, according to a report released this week by theFedea research institute in Madrid. It forecast overspending forthe regions may reach 4 percent of GDP, compared with 3.3 percentlast year and a target of 1.5 percent.

'Political Damage'

The government has ruled out cutting pensions next year andextended a temporary benefit for long-term jobless people to stemgrowing discontent, Afi's Herce said. “Rajoy's strategy is to waitand say little to avoid political damage in the short term.”

Overhauling pensions, which account for 32 percent of governmentspending, is one of the European Commission and InternationalMonetary Fund recommendations Rajoy hasn't yet introduced.Retirement pay has been his only spending increase, ending a freezeimposed in 2010 by his Socialist predecessors.

Support for Rajoy's PP has slipped 8 percentage points since itwon 40.6 percent of votes in a landslide in November. Since then,Rajoy has announced more than 100 billion euros of budget cuts,raising income and value-added tax, scrapping a tax break for homeowners and cutting civil servants' wages, unemployment benefits andhealth care and education spending against his word.

“We believe the Spanish bond market is in a perilous halfwayhouse,” Nicholas Spiro, managing director of Spiro SovereignStrategy Ltd. in London, said in an e-mailed comment. “Germany isunwilling to sanction unlimited and unconditional support whileMadrid is reluctant to cede more fiscal and economicsovereignty.”

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