Is Catalonia the region that benefits most from debt forgiveness?

Madrid / BarcelonaThe Fiscal and Financial Policy Council (CPFF) will debate this Wednesday the proposal of Pedro Sánchez's government to forgive part of the communities' debt. The communities governed by the PP, with Isabel Díaz Ayuso, president of Madrid, at the head, have come out in force saying that it is a pact between the Spanish government and the Catalan independentists to benefit Catalonia. But is Catalonia the community that benefits the most? Several aspects indicate that this is not the case. In fact, overall the communities governed by the PP are the ones that benefit.

In absolute numbers, the community that will see the largest amount of debt forgiven is Andalusia (18.791 billion euros), where the PP governs with Juanma Moreno Bonilla as president. However, Andalusia joined the communities that positioned themselves against the debt forgiveness. In fact, if we look at the first four communities that benefited the most from the debt forgiveness – Andalusia, Catalonia, Valencian Community and Madrid – the three governed by the PP have many more resources than Catalonia.

But absolute numbers are not the only parameter. While it is true that Catalonia is the community that currently has the largest liabilities in absolute terms, 88.917 billion euros, according to the latest data from the Bank of Spain, it is not the most indebted community if the most common criterion for observing public debt is used: the percentage of GDP, that is, how much the public debt weighs on the size of the economy. Thus, if we look at the debt to GDP ratio, the most indebted community is the Valencian Community, around 40%, followed by Catalonia, around 30%, a ratio very similar to that of Castilla-La Mancha. In the case of Andalusia, its debt to GDP reaches just 19%. Therefore, debt forgiveness will reduce Andalusia's debt ratio much more than that of Catalonia.

If we look at the total liabilities, if the Spanish government's proposal is approved - it must be approved by the Congress of Deputies - the Canary Islands would see their current debt (6.467 billion) reduced by half, since the debt forgiveness proposed represents more than 50% of their current liabilities. The Canary Islands are followed by Andalusia (which would see 47% of its current debt forgiven) and Asturias. The communities that will see the smallest proportion of their current debt reduced are, precisely, the Valencian Community, Catalonia and the Balearic Islands. In the case of Valencia, the percentage of debt forgiven in relation to total liabilities is 18.84%. In the case of Catalonia, the percentage rises to 19.24% and in the Balearic Islands, to 20.1%. As for the Community of Madrid, in this case it would benefit more than these territories, since the forgiveness would affect 23.42% of its current liabilities (36,915 million, according to data from the Bank of Spain).

Is only the FLA debt forgiven?

It is important to look at the total liabilities because it is not only the communities that were forced to resort to the regional liquidity fund (FLA) to obtain liquidity following the Great Recession that are being forgiven. This extraordinary mechanism devised by the PP guaranteed that the regional governments that wanted to could finance their debt through the Spanish Treasury and not in the market, where it is more expensive. In fact, communities such as Catalonia or the Valencian Community were forced to do so because they were expelled from the market due to the poor rating of the rating agencies. Others, however, have never been in the market, as is the case of Madrid. However, the forgiveness of part of the debt applies to all. As an example, a report from the BBVA research department estimated that, without the FLA, the Generalitat would have paid 2.5% of interest on the debt for 2022, while with the FLA it was reduced to 1.4%.

The idea is that the debt forgiveness will help the territories that have not yet returned to the market to enter again. However, this step is not automatic. "In many cases, the debt forgiveness will be a necessary condition to return to the markets, but not sufficient," says Diego Martínez, professor of economics at the Pablo Olavide University, who gives the example of the Valencian Community or Catalonia. "In Andalusia, it may help much more," he adds. "It will also depend on the decision of each autonomous community, but with a debt forgiveness, the rating agencies will surely rate their financial condition better, which could make them enter the market under better conditions," says Núria Bosch, professor of Public Finance at the University of Barcelona.

What about the interest?

One question that remains to be resolved is precisely that of the interest linked to the debt that the communities must repay to the State. The Ministry of Finance points out that this will be calculated later, with each autonomous community, although they have placed on the table a fork of between 5,000 and 7,000 million euros in addition to the forgiveness that the territories will be able to save.

However, the total liability that would be forgiven to the communities (83,252 million) is not only due to the over-indebtedness assumed during the worst years of the Great Recession, and that the Spanish government directly links to the policies of the PP, which then governed the State, which assumes that some of them assume cava to cover basic services, so they had no choice but to go into debt or assume the money from the FLA. For this reason, the methodology established by the Ministry of Finance to calculate the tax forgiveness for each territory includes phases with corrections: observing whether or not there has been underfinancing, but also whether or not income has been waived due to the reduction of taxes such as personal income tax. In some cases these corrections have no impact, while in others, such as the case of Catalonia or the Balearic Islands, they benefit them upwards.