Why doesn't debt forgiveness end Catalonia's headaches?

MadridCatalonia will be one of the autonomous communities most benefited by the Spanish government's debt forgiveness – it will see some 17 billion eurosHowever, their headaches won't be entirely resolved, or at least that's what the Independent Authority for Fiscal Responsibility (AIReF) predicts. AIReF has just calculated the implications of this debt forgiveness, should it be finally approved, for the financial health of each region. It's worth remembering that €83.252 billion is slated for forgiveness, representing 24.3% of the current regional debt (€342.804 billion). To begin with, the regional debt forgiveness will allow the regions to meet the legal limit, stipulated at 13% of GDP in 2029, as AIReF indicated this Wednesday. This means complying with this rule of the budget stability law twelve years ahead of schedule. Without the debt forgiveness, the Independent Authority for Fiscal Responsibility (AIReF) estimated that the combined debt of the autonomous communities would reach the 13% of GDP limit in 2041. The total debt of the autonomous communities in the second quarter of 2025 (the latest period for which data is available) was 20.9% of GDP. With the debt forgiveness, it would fall to 15.9%. AIReF also explained that part of this debt reduction is due to the impact of eliminating interest payments. Specifically, the potential savings in interest for the regional governments would exceed €2.5 billion in the first year of the measure's implementation. By 2030, the accumulated savings would reach €15.6 billion, according to the agency's estimate. This figure is higher than that of the Ministry of Finance, which put the savings at just over €7 billion.

In any case, the agency has indicated that the money not used to pay interest cannot be used for other social programs such as healthcare or education, as the spending rule does not allow it, according to sources at AIReF.

Differences between regions

Looking at the regions, some will reach that 13% threshold once the debt relief is applied: La Rioja, Galicia, Andalusia, and Asturias. According to AIReF calculations, these regions join the list that already includes the Basque Country, Navarre, Madrid, and the Canary Islands. Catalonia, on the other hand, will be among the regions that continue to have a debt-to-GDP ratio above the legal limit. Specifically, with the debt relief agreement reached between the PSOE and ERC parties, Catalonia's current public debt (29.3% of GDP) would fall to 23.8% of GDP. According to AIReF, it would not reach 13% until 2050.

Does this mean that the debt forgiveness has no implications for the Principality? Not exactly. In fact, although sources at the Fiscal Authority acknowledge that some regions will maintain public debt above 20% of GDP despite the forgiveness, they also point out that the measure "represents an improvement for their financial situation." "I don't know what arguments could be given for not accepting the debt forgiveness, especially from the autonomous communities with a high level of debt [...] The technical criteria are beyond us; they would be more political," the same sources indicate. Catalonia is one of the regions that fares best. As seen previously, the debt forgiveness would allow it a reduction of up to 5.5 percentage points of its current debt relative to regional GDP. This places it among the group of regions most favored in this de-escalation of the debt ratio, although behind Andalusia, Castile-La Mancha, Murcia, and the Valencian Community.

Now, Catalonia, like the Valencian Community, has a very high absolute level of debt. It's worth remembering that these are the autonomous communities that, in the wake of the 2008 financial crisis, when resources plummeted, took on the most debt to cover basic social expenses. In this regard, the main criticism historically leveled by the Principality is that, since it receives less than it should through the regional financing system, the only solution has been to accept this burden. In fact, sources at the Independent Authority for Fiscal Responsibility (AIReF) emphasize that debt forgiveness should go hand in hand with a reform of the regional financing system model, a topic that the Ministry of Finance plans to address at the next Fiscal and Financial Policy Council (CPFF) meeting. which is part of the agreement between ERC and PSC to invest Salvador Illa.

In any case, the debt forgiveness represents a much lower percentage of the total absolute debt compared to other regions. Specifically, for Catalonia, the forgiveness amounts to 18.9% of the current absolute debt, a lower percentage than the Spanish average (24.3%). Sources at AIReF acknowledge that this reduces the relative impact of the measure on the total debt.

Going to the markets?

Given this scenario, sources at the Independent Authority for Fiscal Responsibility (AIReF) do not see a feasible market exit strategy for Catalonia in the short term, as the region continues to require the extraordinary mechanism of the Regional Liquidity Fund (FLA). This is one of the objectives of the regional debt forgiveness program. The Spanish government wants to relax the conditions for accessing the markets so that regions that still need the FLA can do so, although restrictions are in place: compliance with the budget stability target (surplus or balanced budget in 2024) and that the debt be below 19.5% of GDP. Catalonia, despite the regional debt forgiveness program, would still fail to meet both criteria. Although the measure allows it to move closer to meeting these targets, it does not solve its underlying problem, especially considering that The Catalan government intends to return to the markets next year..