The era of ultra-low rates is over and the debt burden is already heavier for everyone. Mortgages have become more expensive, the State pays more for its titles and regional governments bear higher interest rates to finance their liabilities: until February, they paid 34% more compared to the previous year, according to the Ministry of Finance. The increase also affects the autonomies that rely on the cheap loans that the Treasury promoted after the 2008 crisis, the extraordinary financing mechanisms, designed as an alternative to a hostile market due to the attacks on sovereign debt. The rates associated with these lines are already double those of 2022 and are, on average, close to 20 times higher than those of 2021: they have climbed to 3.2%, compared to 1.6% the previous year and 0.1 % of the previous one, according to the estimates of the consulting firm Analistas Financieros Internacionales (Afi). Interest payments, for their part, reached 625 million between January and February, 158 million more than in 2022. The rise is not alarming, but the scenario remains uncertain and its evolution will depend on inflation and future ECB decisions. .
The interests associated with these mechanisms began to grow last year dragged down by the restrictive monetary policy inaugurated by the ECB to curb galloping inflation. This means that as the debt matures, new issues and refinancing are becoming more expensive. The same happens with the communities that are financed in the market, which face higher rates —at the moment, around 3.5%—, with the difference that their liabilities have a longer average life and are being financed at longer terms.
“Proportionately, the interest expense item of the communities that are covered by the extraordinary financing mechanisms will rise more, because each year a greater percentage of their debt stock will mature,” explains César Cantalapiedra, managing partner of Afi. The average life of its liabilities is about 4.7 years, compared to 6.4 years for the communities that go on the market.
The possibility of resorting to extraordinary mechanisms materialized in 2012, in the midst of the European debt crisis, as an escape route for those communities from which the market demanded a prohibitive cost to finance themselves. These lines have changed over the years and now there are two large compartments: the Autonomous Liquidity Fund (FLA) and the Financial Facility (FFF). The first is designed for autonomous regions that do not comply with fiscal rules and is incompatible with the market, while the second allows money to be raised abroad and is reserved for those communities that respect the limits set for debt, deficit and spending rules. Since 2021 there is also a fund fed with European money to finance the excess deficit caused by the pandemic.
These extraordinary mechanisms, as his last name says, would have had to disappear once the urgency of the Great Recession faded. But it never happened. Community debt grew rapidly after the financial crisis, and with it the volume of Treasury loans, which were also maintained when market rates fell —to negative ground—, risk premiums relaxed and financing experts They recommended turning off the tap.
As of today, the State is the first creditor of the regional governments: it owned almost 60% of the 316,937 million regional debt at the end of 2022, according to the Bank of Spain, although with enormous differences between territories. Catalonia, the Valencian Community and Andalusia account for almost 8 out of every 10 euros of regional liabilities in the hands of the State.
Financing needs
The gross financing needs of the communities that Afi estimates for this year exceed 42,000 million euros. Catalonia is in the lead, with almost 12,000 million, due to the largest maturities it accumulates. They are followed by the Valencian Community and Andalusia, two of the worst financed regions in the system, along with Murcia, which demand to find a solution to the accumulated debt due to receiving fewer resources. According to Cantalapiedra, the rise in rates will increase the pressure: “It will revive the claim that part of that debt be assumed by the State, or that it be restructured so that the amortizations are longer term. But politically it is complex.
Currently, 10 of the 17 communities are receiving credit lines from the Treasury. Andalusia is the only one that relies on the Financial Facility and at the same time on the market. Aragon, Castilla-La Mancha, Catalonia, Extremadura, the Valencian Community, the Balearic Islands, Cantabria, Murcia and La Rioja depend on the FLA; Castilla y León, the Canary Islands, Galicia, Asturias, Madrid, the Basque Country and Navarra only go to investors. Between 2012 and 2020, the interest savings of the communities benefiting from the mechanisms – or, rather, the cost to the State – has exceeded 17,000 million, according to estimates by Ángel de la Fuente, director of the Fedea study center. “It’s a minimum estimate,” he says.
The regions that have benefited the most from these schemes have been Catalonia and the Valencian Community, which account for more than half of the resources collected from 2012 to now. Of a total of 367,437 million accumulated in the period, more than 123,000 have gone to cover the financing needs of Catalonia, 85,400 to the Valencian Community. They are followed by Andalusia (49,150 million) and, at a great distance, Murcia (17,900). At the other extreme are the Basque Country, Navarra and Madrid.
Santiago Lago, a professor at the University of Vigo and a senior researcher at the Funcas study center, believes that until now it has not been possible to dismantle the extraordinary mechanisms due to the lack of consensus on what to do with the liabilities accumulated to date. “The fact that there are very asymmetric situations, such as those of Catalonia or the Valencian Community versus Madrid, for example, makes it difficult for us to find a solution that is perceived as fair and reasonable by the majority.” De la Fuente adds that neither the regional Executives nor the central one made too many efforts to leave the model behind. “Communities are subsidized interest costs and governments [centrales] It didn’t seem bad to them to have a certain amount of control over them”.
On the other hand, the return to the markets of the communities that most depend on these lines would be subject to prohibitive risk premiums. “The debt burden with the rates that are expected towards the end of the year for the Treasury debt would force communities such as Valencia or Catalonia to dedicate 10% or more of their ordinary budget to interest payments,” Santiago Lago points out in an article published in Funcas. The economist, however, warns about a possible cancellation. “The figures are very unequal and the risk of perceptions of comparative grievance between autonomies is very high. I do not see a substantial reduction of the principal politically feasible. A pragmatic solution would be to transform the mechanisms into debt for 50 years or more at very low interest rates, around 1%”. De la Fuente agrees, but does not fully see the lengthening of the deadlines. “It would be a viable solution politically, but bad economically. It would be another umpteenth rescue of the communities that would further reduce their incentives to control spending or raise taxes ”, he settles.
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