Who pays the round of regional debt

The thorny issue of regional debt, the distribution of economic responsibilities and the financing of each territory has re-emerged after the investiture agreement between PSOE and ERC by which the State undertakes to forgive part of the debt owed by Catalonia. has with the Central Administration. The issue is not trivial, beyond the 15,000 million euros that the Generalitat will no longer have to assume for a debt of more than 84,000 million, the highest in all of Spain. Who assumes that amount? How much will it be reduced to the rest of the communities of the common regime (all except the Basque Country and Navarra)? What will territories that do not have state debt, like Madrid, do?

Let’s go from more to less. From the global to the particular. Spain currently has a debt of more than 1.59 trillion (with a ‘b’) euros in its drawers. It is the historical maximum. Although if it is compared with the national wealth as a whole (the Gross Domestic Product -GDP-), it represents 111%, with a drop from the record of 125% at the beginning of 2021. The economic aid to face the inflation derived from the war in Ukraine, the measures to combat the coronavirus crisis have left their mark on Spain’s commitments to its creditors – with whom they lend them money, basically – in the last four years: 220,000 million more.

Public debt has been, is and foreseeably will be the Achilles heel of the Spanish economy. Gone are the years in which almost no administration could go to the market to borrow money. Because nobody was betting on Spain. It was between 2011 and 2013, in the middle of the sovereign crisis. And since no one gave a penny abroad, the State enabled a formula so that the autonomous communities did not go bankrupt: the Autonomous Liquidity Fund (FLA). A temporary solution to provide liquidity to regional accounts that needed it in the face of the closure of global banks and investments.

Catalonia was from the first moment the community that demanded the most money from the State to finance itself with the FLA. Internally, the Generalitat has always alleged underfinancing. That is, it does not have sufficient resources based on its economic weight and tax contribution with respect to what it receives. It’s not the only one. The same thing happens to Madrid, the Balearic Islands or the Valencian Community: they receive less money from the State than they contribute based on the taxes paid by their taxpayers. But underfinancing is one thing and lack of budget and debt control is another.

Ten years after the launch of the FLA, Catalonia has been the community that has turned the most to the State to continue financing its services. Basically because it still almost cannot find creditors to give it loans and other financing mechanisms, as is already happening in other territories. The snowball has been growing at such a rate that only a reduction seems to be the solution to partially address this financial problem. It represents 20% of the Spanish GDP.

The only reference that has been put on the table is the 15,000 million forgiven to Catalonia. But it is still unknown how much money will be forgiven for the rest of the communities with state debt. It will not be that 20% percentage. It will depend – again – on its “underfinancing.” That is to say, some will come out better than others, which will reactivate interterritorial tension.

The question underlying this Solomonic solution is who and how this measure will be paid for. Because the debt does not become volatile. Whether municipal, regional or state-owned. The payment commitments will continue to be there to finance those billion and a half euros that the Kingdom of Spain owes, regardless of how the cake is distributed. The economic vice president, Nadia Calviño, has just confirmed this in an APIE forum: “We are talking about a transfer between administrations with an accounting impact, but that does not affect Spain’s position in the financial markets.” That is, communicating vessels between autonomies and the State.

Since 2020, the State has played a key role in terms of debt. While that of the communities has been reducing, that of the Central Administration has not stopped growing. If the Government decided to apply a blank slate of a global forgiveness of 20% to all communities, it would have to swallow almost 40,000 million euros to finance in the markets.

“We are talking about a transfer between administrations with an accounting impact, but that does not affect Spain’s position in the financial markets”

Nadia Calvino

Economic Vice President of the Government

To a large extent, the communities have received more than 13,000 million euros between 2020 and 2021 to face the million-dollar expenses derived from the coronavirus crisis. On this occasion it has been all the territories that have received money. In fact, only Andalusia, Catalonia, the Community of Madrid and Valencia have received more than 70% of these amounts.

It won’t be that amount. It will be inferior because not all regions will be forgiven the same. But regardless of the figure it represents, there is one clear aspect: all Spaniards will have to assume this increase in debt. Regardless of whether they reside in a community that is financed through the State or not. Even in the Basque Country and Navarra, with financial autonomy. The reason? The State will be obliged to the usual old bill: raise taxes (VAT, Special Taxes and other figures are at the state level without distinguishing communities); reduce public spending (thousands of items in the Budget affect all Spaniards, such as infrastructure); or, what is more likely, pay more money for the interest on the debt that Spain has. And that amount is paid by everyone. Possibly even among those who have the most income. Precisely those who live in Madrid, the Basque Country, Navarra… and Catalonia.

The measure will partially relieve the finances of the autonomous communities. Although in some to a much greater extent than in others. Territorial tension again. When the Executive implements the new autonomous financing law, it will be time to validate what financial responsibilities are required of the autonomous communities in exchange for this type of debt forgiveness.

It will be something similar to what happens to thousands of citizens with their mortgages and the inability to access their payment after the rise in rates in recent years. “Do you want a haircut, a refinancing or a fee reduction?” the banks ask. “Well, you can do it but under certain conditions,” they demand. In the case of territorial financing, it remains to be seen what commitments of budgetary rigor the communities will make from now on.

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