Catalonia, on whose debt and its eventual cancellation a debate has just been opened regarding the investiture negotiations, is not the autonomous community that owes the most money in relation to its GDP, but it is the one that faces the highest bill for the ECB interest rate hikes.
According to a report published today by Fedea, the rate increases will have a notable effect on the 316,894 million euros that the autonomous communities owe as a whole, which will go from accruing interest of 3,608 million in 2022 to 8,659 million in 2026, to an average of 5,051 million per year.
The forecast is that Catalonia will go from paying only 1,029 million euros in interest on the debt in 2002 to almost two and a half times more in 2026: 2,412 million. On average, it will have to face an annual invoice of 1,383 million throughout this year and the next three, 35% more than what was paid last year.
The ECB's decisions to raise interest rates to 4.25% adds significance to the requests by Junts and ERC to forgive the Catalan debt as part of the investiture negotiations. At the end of July, the Minister of Finance, María Jesús Montero, did not rule out this possibility, indicating that "the Government will have to tackle the entire puzzle" of the regional debt.
In absolute terms, also according to today's report by Fedea, Catalonia is the autonomous community with the most debt in 2022, with 84,327 million euros. They are followed by the Valencian Community, with 55,032 million, Andalusia, with 37,870 million, and Madrid, with 34,821 million. The forecast is that this year the Catalan debt will increase to 86,032 million.
On the other hand, the weight of the Catalan debt over its GDP is 33.4%, compared to 44.4% in Valencia and the same percentage as Castilla-La Mancha. Murcia is at similar levels, while Madrid, with 13.5%, is in the lowest part of the table. In 2023, Catalonia will reduce this percentage to 32.1%, which will place it in fourth regional position.
The result of this starting point and the evolution of the cost of debt is that in 2026 Catalonia will pay 2,412 million euros for its debt, compared to 1,104 million in Madrid or barely 92 million in Navarra, while, annual average between 2022 and 2026, its bill will have been 1,383 million, about 400 million higher than the second community with the highest load, Valencia, with 985 million, and well above the 343 million of Madrid.
Fedea indicates that in the coming months and years the autonomous communities must renew the debt issued at especially low prices, in a context in which the State is already paying more than 3% for its issuance of bills and bonds.
If in 2022 the autonomous communities paid an average of 1.1% in interest, in 2026 they will end up paying 2.7%. The Generalitat paid 1.2% last year for its debt and within four years it will face rates of 2.8%. Madrid will have more pressure in this aspect, since it will go from paying 2.2% now to 3.1% in 2026.
Fedea concludes that, although the weight of the regional debt over the total administrations will decrease, the financial cost will increase, and that "would force redirecting increasing resources from other public policies to debt service, a less than optimal and less desirable circumstance ".
"The autonomous communities must be aware that embarking on significant tax reductions and spending projects of dubious social profitability would clearly damage the sustainability of regional public finances," he assures, before calling for a "strategy" in this regard and considering that each administration must "calibrate very prudently" its expansive policies.
The Bank of Spain has already warned that next year, with the new fiscal rules in the EU after years of permissiveness with debt and deficit targets, the time will come for consolidation in this area, which, euphemisms aside, It means raising taxes or cutting spending.
The autonomous communities will have to finance in the coming years not only the debt maturities that occur, whose renewal will be made at higher rates, but also the public deficit of each year and the pending one from previous years.
One of the differences with the current sequence of interest rate hikes, the one that began in 2008 and applied during the Great Recession, is that public debt was much lower. That of Spain as a whole was 36% of GDP in 2008, compared to 6% of the autonomous communities. In 2022, after the effort of the pandemic, it amounted to 112% and 24% at the regional level.
