While Spain fights to avoid a full-scale bailout, Madrid is bailing out its own semi-autonomous regions. A regional liquidity fund has been set up, but will it be enough? As regional debt shakes investor confidence even further, time is in short supply.
The slow-motion implosion of the Spanish economy has entered its next phase. After fuelling years of boom, the mother of all property bubbles burst, sending the national economy plunging into recession. Now, Spanish cajas and banks, sitting on a toxic pile of subsequently worthless, half-built, investments and defaulting mortgages, need bailing out.
All the while, unemployment has reached socially disastrous levels. The Spanish economy is stuck with an unholy trinity of recession, public sector cuts and private-sector reluctance to invest. The government and the IMF now see recession continuing throughout 2013.
After the apparent success of Spain to secure a €100bn Eurozone package for its ailing banking system, paving the way towards a banking union; a new wave of market panic has been triggered by the unfolding of the regional debt crisis. Spanish interest rates on the bond market have shot back up to unsustainable, bailout-triggering levels.
For years simmering, the next phase of Spain’s economic meltdown has come to the boil: three of Spain’s 17 semi-autonomous regions recently submitting bailout requests to the central government. A further eight have been warned by Madrid that they are not meeting their centrally-approved austerity budgets.
The failure of the regions, who between them account for some 40% of public spending, to get on top of their budget’s was the main factor that led to Madrid’s failure to reach the 6% national deficit target in 2011; finalising with 8.9%. While the regions were instructed to reduce their collective deficits by 1.3% of GDP, deficits instead rose by 3.4%.
Madrid is seeking to remedy this crisis, and allay its creditors, through a €18bn Regional Liquidity Fund (RLF). Finance Minister Cristóbal Montoro can dispatch what he calls “the men in black”, to rifle through regional accounts before awarding rescue funds, which will be paid in installments with strict budgetary and fiscal strings attached. Sounds familiar?
This is unlikely to be enough to fully convince the markets, however. More pea-shooter than big bazooka, it is less than clear that it will be sufficient given the scale of the debt: Catalonia alone has €42bn worth, of which €5.7bn will have to be serviced this year.
The most high-profile victim of the crisis, North-Eastern Catalonia is one of the most dynamic regions of Spain, accounting for one-fifth of Spain’s total output and itself an economy the size of Portugal. Last year, Catalonia ignored Madrid’s deficit target, extolling the need for slow fiscal consolidation. The most indebted of regional governments however, and on its fifth fiscal adjustment plan, its long-running budget deficit is out of control. In an ironic parody of Madrid’s recent negotiations in Brussels, the Catalan government insists that it has not sought a bailout, but a no-strings-attached line of credit.
As of yet, the RLF has not been put under much pressure. Valencia claims it will request more than €2bn and Murcia €300m. Adding Catalonia into the equation is still manageable. However, if more regions start applying to the RLF, and it seems that as many as a third might, the RLF will be tested to breaking point.
Moreover, the chaotic nature of relations between Madrid and the regions has not inspired confidence amongst investors. When Spain failed to meet its deficit target last year, it became clear that Madrid had little control over the region’s finances. Neither have some of the roots of the crisis. In Valencia, run continuously by the governing Partido Popular for 17 years, broad macro-economic failings were only made worse by public profligacy and a liberal dollop of cronyism and corruption.
The Prime Minister, Mr Rajoy, will rely increasingly this summer on Mario Draghi, president of the ECB, to follow through on his hint that the ECB will return to the secondary bond markets to alleviate the cost of borrowing for the Eurozone’s beleaguered governments. As the regional dimension of Spain’s debt crisis unfolds, the end-game looms for Madrid’s quest to solve Spain’s debt crisis without EU and IMF funds.
