The Foundation for Applied Economic Research (Fedea) cautions that the unconditional forgiveness of regional debt included in the investment agreement between Pedro Sánchez’s PSOE and the ERC is a risky move. It could worsen the serious incentive problems already seen in the financing system for autonomous regions within Spain.
In an analysis released this week on the economic content of investment agreements, Fedea’s managing director, Ángel de la Fuente, says that any reductions lacking strict regulatory conditions are likely to reinforce the perception that autonomous communities can spend beyond their means. The state will eventually cover deficits, which could invite fiscal indiscipline. De la Fuente argues that such arrangements create an almost insurmountable obstacle to responsible budgeting.
The critique: the agreement may fuel fiscal irresponsibility
The Governor of the Bank of Spain, Pablo Hernández de Cos, also warned about the drawbacks of forgiving regional debt. At a public event, he described the debt relief agreed by the PSOE and ERC as a temporary fix that shines a light on the longstanding issues in Spain’s regional financing framework. He noted that the financing system is not closed, and financial imbalances, budget deficits, and rising public debts are not necessarily signs of good management but rather a signal that resources are strained.
De Cos expressed concern that a perception of available resources could be used as a reason to bail out the state budget in ways seen in the past, such as during the era of the autonomous financing fund (FLA) under Mariano Rajoy’s government or in current austerity steps. He warned that policymakers should not rely on debt relief as a default solution while the underlying fiscal pressures remain unresolved.
Estimated impact: a sizable relief package
The investment agreement between PSOE and ERC includes a commitment to forgive Catalonia’s 15 billion euros of debt incurred with the state via the Generalitat’s Autonomous Liquidity Fund (FLA). The agreement also proposes extending this relief to other common regime regions, with certain exceptions such as the Basque Country and Navarra.
The 15 billion euros forgiveness for Catalonia represents about 20% of the debt Catalonia held with the FLA. Fedea estimates this relief translates to roughly 1,980 euros per person based on 2021 data and anticipates that, when extended to the other regions, the total forgone debt could approach 88 billion euros. Regions expected to see substantial relief include Andalusia, Madrid, and the Valencian Community, with notable portions of the total allocated to those areas.
However, the government has not yet specified the general criteria that will guide the broad application of regional debt forgiveness. The agreement with ERC simply notes compensation for higher debt levels incurred during the financial crisis period of 2007 to 2014.
In this context, the 15,000 million euro reduction for Catalonia accounts for about 31 percent of the extra debt Catalonia accrued during the crisis. If the state had covered roughly a third of the debt accumulated by all regions in that period, the total relief could reach around 55,000 million euros. This is a theoretical calculation, and the final math will be determined by Treasury decisions.
Investment agreements and their implications
In the analysis published by Fedea, Ángel de la Fuente examines the economic effects of the investment and legislative agreements reached with PSOE, Sumar, ERC, Junts, PNV, BNG, and Canary Coalition. The author notes that the texts leave many important issues open and often hinge on initiating negotiations whose continuation depends on the political support from nationalist parties.
From the outset, the author identifies two risks and one certainty. He states that the general and unconditional forgiveness of debts across common regime communities could intensify the already present fiscal indiscipline, with potential impacts on economic growth, employment, and the sustainability of public accounts. On the other hand, the agreements may influence social and territorial harmony in both directions, depending on how policies are implemented and perceived.