Assessment of a Debt Forgiveness Plan Across Spanish Regions
Ahead of a clear formula guiding negotiations between the Ministry of Finance and each autonomous community, S&P Global Ratings simulated the potential impact of extending the 15 billion euro debt forgiveness granted to Catalonia to all regions. The scenario suggests the total debt that could be absorbed by the state might rise to as much as 71.73 billion euros.
The agreement text between the PSOE and ERC explains that applying the 15 billion euro write-off to other communities would rely on the higher debt levels they carried during the last financial crisis, specifically referencing a surge in liabilities between 2007 and 2014 when debt quadrupled. This framing underlines the political logic behind expanding the incentive beyond Catalonia (Catalonia) to other regions based on past debt burdens (PSOE-ERC agreement, 2023).
In a report published by S&P on a recent Monday, the agency outlines a four-scenario exercise to gauge how a debt relief of this magnitude could affect the communities. In each case, Catalonia would still receive the full 15 billion euro write-off, but the distribution of relief to other regions would depend on the chosen criterion. Analysts caution that while debt relief would improve credit perceptions, it would not suffice to meaningfully boost regional finances in the near term. There is also a warning about moral hazard, where such measures might lessen regional incentives to monitor debt growth, given that the state could rescind liabilities later (S&P Global Ratings, 2024).
Four Scenarios
Scenario 1 starts from the level of regional debt accumulated between 2008 and 2014. The 15 billion euro relief to Catalonia represents 30% of its debt from that period. Extending this rule to all regions would raise the total debt absorbed by the state to 49.72 billion euros, with specific impacts including: Valencia 7.7 billion, Andalusia 6.45 billion, and Madrid 5.52 billion. Under the 30% rule, reductions would also relieve Castile-La Mancha by 2.81 billion, Castile and Leon by 2.0 billion, Murcia by 1.84 billion, Balearic Islands by 1.46 billion, Aragon by 1.33 billion, and Canary Islands by 1.32 billion; Asturias 0.83 billion, Extremadura 0.67 billion, Cantabria 0.59 billion, and La Rioja 0.27 billion. These figures scale down for other regions such as Asturias, Extremadura, Cantabria, and La Rioja when applying the same rule (S&P Global Ratings, 2024).
Scenario 2 extends the same debt cut to all communities. In this setup, most regions see meaningful reductions, with financially weaker areas benefiting more. The total impact would amount to 60.13 billion euros (S&P Global Ratings, 2024).
Scenario 3 bases relief on the cumulative GDP loss from 2008 to 2014. The 15 billion euro Catalonia figure is treated as a proportion of that loss and then applied elsewhere. This approach tends to favor regions harder hit by the crisis, and it presents a better outcome for Andalucía, Aragón, Asturias, and Cantabria, with total impact around 69.42 billion euros (S&P Global Ratings, 2024).
Scenario 4 uses the accumulated deficit as a share of regional GDP. The same proportional rule is extended to all regions. This option benefits better‑funded regions with higher GDP, including Madrid, and is notably favorable to Galicia, Castilla y León, Canarias, Balearic Islands, Extremadura, and La Rioja. In this scenario, extending the 15 billion euro relief to all regions would cost the state about 71.73 billion euros (S&P Global Ratings, 2024).
Lower Financing Needs
Independent of the precise effects, the rating agency notes that debt forgiveness could reduce financing pressures for all regions. It also anticipates somewhat higher debt issuances in 2024-2025 from the most active regions, particularly Madrid, Catalonia, and the Basque Country. While effective interest rates are expected to rise, these increases are projected to be gradual and manageable due to rising autonomous revenues (S&P Global Ratings, 2024).