Since the beginning of the crisis, Spanish regional government debt has increased by 50%. Yesterday the Bank of Spain said yesterday that in 2011 regions broke a new debt record, topping 140.083 billion euros for an increase of 17.2% on the year. Catalonia, Valencia and Madrid, in this order, led the rankings. Yet their situations are distinct. Catalonia is responsible for 30% of all Spanish regional government debt, the volume of which equals 20.7% of its GDP. Valencia is posting similar numbers. But Madrid's debt, which is 11% of all regional debt, is only 7.9% of that region's GDP.
Further, Madrid met its deficit objective last year, while the others ran a deficit in order to obtain short-term cash, which was alarming. In addition to this problem, there is a whopping 35 billion euros in service provider debt, and many creditors indicate that another 35 billion could be hidden in unallocated bills and invoices.
The fact that local government debt has been reduced does not offer much consolation when these governments will need to provide 9.584 billion to finance a government-imposed payment plan that aims at paying service providers. These figures highlight a scandal that is requiring the national government to restructure all levels of government, attempt to centralize state-funded services, merge town councils, set stricter controls, limit spending of tax revenues and forget the pressures mounting around the Andalusia elections.
Because the debt that has piled up will be difficult to refinance given that much of it has junk bond status. Using hispanobonos for all of it should not be used to relinquish their iron control of their budgets to the State. The only option that remains is a sharp spending cutback in order to adapt to a new normal, because it would be too challenging to increase revenues at this time.
