The turn of the helm in the monetary policy of the European Central Bank to face inflation that is damaged at 8.5% in February (with the base, which excludes its calculation, energy and fresh food at record levels of 5.6% , according to Eurostat) has triggered financing costs for both the private and public sectors. The fastest rise in rates since the creation of the euro, the increasingly close completion of the debt purchase programs deployed by the entity and the recovery at the European level of fiscal rules (debt and deficit limits) may suppose a problem of the first order for the most indebted administrations.
In the specific case of Spain, the focus shines directly on the autonomous communities that are in a more vulnerable situation. So much so, that if the most indebted autonomies had to go directly to the markets to finance themselves -without the support of the extraordinary financing mechanisms deployed since 2012 by the State, its current main creditor- they would have to face premium costs “prohibitive” risk factors.
In the report ‘The debt of the autonomous communities: recent evolution and perspectives’, prepared by Santiago Lago Peña, professor of Applied Economics at the University of Vigo and senior researcher at Funcas, explains that the debt burden with the rates that are expected towards the end of the year for the Treasury it would “force” autonomies such as the Valencian Community or Catalonia to dedicate 10% or more of their regular budget to interest payments. It is true that this increase in spending could be extended over time depending on the average life of the outstanding debt and the requirements on new issues.
Only these two communities are responsible for 44.1% of the increase in debt for the sector as a whole between 2007 and 2022. Valencia’s financial liability touches 45% of its economy, while three other autonomies exceed 30% (Catalonia, Castilla – La Mancha and Murcia) and in a fourth, the Balearic Islands, this is also above the average for the Autonomous Communities as a whole, which reaches 24.2%. Currently, these five regions represent 72% of the extraordinary financing mechanisms, despite the fact that together they barely account for 37% of the total population.
From the European rating agency Scope Ratings they value how “sovereign loans have become a permanent safety net for the Autonomous Communities”, while recalling that in recent years the strongest regions are gradually returning to financing autonomous In response to the damage caused by the Covid-19 pandemic, the central government has strengthened financial support, covering additional expenses and fully centralizing the negative effects on its budgets.
The first affected by the rise in interest rates
For this reason, in the German firm they foresee that the main changes in the solvency of the autonomies will take place “through the sovereign rating”, although there are “notable” differences between their individual credit fundamentals. They also recall that the regions that depend on public financing (from extraordinary liquidity mechanisms) have, in general, a shorter average maturity of the debt, so they will be affected earlier by the rise in rates, since that the annual renewal of the debt is higher.
Spain is the OECD country in which the regional debt has warned more intensely since the last financial crisis. Before 2007, the liabilities of the autonomous communities as a whole represented little more than 5% of their GDP, which placed them at very low levels, similar to those of the territorial administrations of countries such as Austria, Australia and Belgium. This changed dramatically during the Great Recession. As a result of that shock, the Spanish communities came to occupy second place in the list of the most indebted, only behind the Canadian provinces. That is, before Covid-19, their debt was equivalent to more than 25% of their wealth.
The collapse of income, more closely linked to the real estate bubble, and spending that is difficult to adjust downwards -because it is concentrated in fundamental public services- would explain this evolution. Health represents more than 30% of total spending at the regional level and Education around 20% on average. Social protection, infrastructure and transport also take an important part of their disbursements. All in all, in a context such as the current one, the evolution of regional debt should demonstrate strong revenue dynamics in the coming years thanks to the arrival of European funds, which should reduce recourse to debt financing.
