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

MadridCatalonia will be one of the autonomous communities that will benefit most from the Spanish government's debt forgiveness program. However, its financial woes will not be entirely resolved, or at least that is the prediction of the Independent Authority for Fiscal Responsibility (AIReF), which has just calculated the implications of this debt forgiveness, should it be ultimately approved, for the financial health of each region. It is worth remembering that €83.252 billion is expected to be forgiven, representing 24.3% of the current regional debt (€342.804 billion). To begin with, the debt forgiveness will allow the autonomous communities 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 debt forgiveness, the Independent Authority for Fiscal Responsibility (AIReF) estimated that the region as a whole would reach the 13% of GDP limit in 2041. The combined debt of the autonomous communities in the second quarter of 2025 (the latest for which data is available) was 20.9% of GDP, and with debt forgiveness, it would fall to 15%. Looking at individual regions, some will reach this 13% threshold once the forgiveness 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. In contrast, Catalonia will be one of the few regions that will continue to have a debt-to-GDP ratio above the legal limit. Specifically, with debt forgiveness, the current public debt (29.3% of GDP) would fall to 23.8% of GDP. It wouldn't reach 13% until 2050, according to AIReF.

Does this mean that the debt forgiveness has no implications for the Principality? Not exactly. Catalonia is one of the regions that fares best. As seen previously, the debt forgiveness would allow it to reduce its current debt by up to 5.5 percentage points relative to its regional GDP. This places it among the most favored regions in this de-escalation of the debt ratio, although behind Andalusia, Castile-La Mancha, Murcia, and the Valencian Community. However, 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 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 (Independent Authority for Fiscal Responsibility) acknowledge that this reduces the relative impact of the measure on the total debt.

Given this scenario, sources at the Fiscal Authority do not see a feasible exit to the markets in the short term for Catalonia, which continues to need the extraordinary FLA (Regional Liquidity Fund) mechanism. This is one of the objectives pursued by the forgiveness of regional debt. 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 balance in 2024) and that the debt be less than 19.5% of GDP. Catalonia, despite the cancellation of its regional debt, would still fail to meet both criteria. Although the measure allows it to get closer, it doesn't solve its problem, especially considering that The Catalan government intends to return to the markets next year..