Debts of autonomous communities surged after the 2008 financial crisis, climbing from 5.8% of GDP in 2007 to 20.6% in 2013 and 27.2% in 2020, with an average around 23.2% of GDP. In regions such as the Valencian Community, the ratio reaches 43.5% of GDP. The financial autonomy of these communities has been undermined by the weight of debt, and the possibility of state-led cuts has been a persistent topic for years. As negotiations for Pedro Sánchez to become Head of Government unfold, regional debt relief is considered within the PSOE talks with ERC. There are two main paths to a debt haircut: debt forgiveness or renegotiation of terms and interest rates. Neither option is simply accepted in political circles.
More than half of regional debt is held by the state through liquidity support mechanisms like the Autonomous Liquidity Fund, known as the FLA. When markets demanded high interest rates during the debt crisis, the Treasury covered the debt and then channeled liquidity to the autonomous communities. By 2012, tools like the FLA were created to stabilize regional finances, and today about 58.6% of regional debt is owed to the state. One approach to debt relief is for the state to assume a portion of these obligations.
The Treasury has been cautious about using terms like debt forgiveness or cancellation in public discourse. A former minister faced resistance when regions such as Galicia and Madrid, both governed by the PP and with comparatively lower debt, pushed for relief they viewed as forgiveness rather than restructuring. Madrid has continued to resist such proposals.
The idea of forgiveness is effectively off the table in public negotiations. The Valencian government argues that the state has already absorbed a large share of regional liabilities, estimating 23,000 million euros in accumulated underfunding as of 2021, while preferring the term debt offset to forgiveness.
Other routes to achieve a financial impact similar to relief include renegotiating loan terms and extending maturities while lowering rates. Extending the debt profile can reduce the present value of obligations and soften annual payments. For instance, increasing the typical 5-year loan horizon to as long as 75 years and lowering average rates from 0.75% to 0.05% could bring about a substantial reduction in the current value of debt, according to estimates presented by AFI at a Valencia conference on debt and regional finance. The effect is a marked easing of the annual fiscal burden without shrinking the debt figure itself.
At present, the Treasury has not laid out a concrete plan to ease regional debt, though Acting Finance Minister María Jesús Montero has signaled possible targeted aid for underfunded communities. Analyses from the Fedea foundation show that regions such as Valencia, Murcia, Andalusia, and Castilla La Mancha have received relatively low funding per capita in recent years. Catalonia and the Balearic Islands are also seen as underfunded, but the Treasury views the issue as part of broader discussions on a new regional financing framework that has awaited reform since 2014.
Back in 2018, the then Finance Minister Cristóbal Montoro introduced a provision in the State Budget Law that opened the door to regional debt relief contracted with the state. A 2017 expert commission had discussed options to ease accumulated debt, yet changes were delayed by the 2018 government transition and the health crisis. With higher interest rates anticipated for a long period, the push to relieve the fiscal burden for autonomous communities with high debt ratios gains urgency. The political alliance between PSOE and Sumar provides a political opening to advance these negotiations.
Catalonia stands out as the autonomous community carrying the largest absolute debt, reporting 84.8 billion euros and accounting for 32.4% of GDP, second to the Valencian Community with 43.5% of GDP. Catalonia owes much of its debt to the state through mechanisms like the FLA, amounting to about 84 percent of its total debt.
By mid-2023, regional debt averaged 23.2% of GDP nationwide, with a range from roughly 13% in some regions such as the Basque Country and Navarra to 43.5% in the Valencian Community and Catalonia. Madrid, Canary Islands, and others fall between these extremes. The higher debt ratios would have been unaffordable without state financing through the FLA and similar tools kept at low interest. In return, some regions lost a degree of financial autonomy that others still maintain. In Galicia, Asturias, the Canary Islands, and Castilla y León, the share of debt held with the state ranges between 14% and 22.4%. The overall picture shows a nuanced trade-off between regional funding, autonomy, and the tools used to keep finances afloat, a topic closely watched in ongoing fiscal reform discussions.