Tuesday, October 19, 2010

Cash Starved Catalonia

Cash-starved Catalonia turns to locals

By Victor Mallet in Madrid


Published: October 15 2010 18:38 | Last updated: October 15 2010 18:38

Shunned by international investors, the usually ebullient Antoni Castells, finance minister for the Spanish region of Catalonia, is so short of cash that he has turned to Catalans themselves to buy bonds to finance the deficit.

This week’s move by Catalonia’s Generalitat, the autonomous regional government, to raise up to €2.5bn ($3.5bn) by selling bonds through local banks has fanned the smouldering fires of Catalan nationalism and exposed the financial weaknesses of Spain’s devolved system of government.

The neighbouring Mediterranean region of Valencia is also in dire financial straits and the outlook for each of the 17 Spanish regions is listed as “negative” by credit rating agencies.

Total debt of the autonomous regions has doubled to almost €105bn in five years, according to the Bank of Spain.

Artur Mas, leader of the moderate Catalan nationalist party Convergència i Unió and likely winner of next month’s regional election, declared that Catalonia’s bond plan showed “the coffers of the Generalitat are bare”.

By paying a generous 4.75 per cent interest rate on the one-year bonds as well as an estimated 2-3 per cent commission for the banks, Catalonia is paying a high price to keep itself liquid.

But a downcast Mr Castells, member of a tripartite government dominated by the Socialists, described the bond issue as “attractive” and “necessary” and said: “It can’t be said that we’re bankrupt. No one would say that in a serious country.”

He predicted that other regions would take the same approach to fundraising from local citizens.

After years of rapid economic growth, abundant tax income and rising expenditure, the autonomous regions – as well as the municipal authorities in many towns and villages – are reeling from a crisis that has made property taxes evaporate and forced the central government to slash the public sector deficit.

The future of regional finances is of vital importance to the credibility of Spain’s austerity plans and the stability of the eurozone, because the regions account for more than half of all Spanish spending, mainly on education and health, while the central government controls 30 per cent and the social security system spends the rest.

Lorenzo Bernaldo de Quirós of Freemarket, the Madrid-based consultant, said on Friday the financial difficulties of the regions had revealed the “botched” nature of Spain’s decentralised constitution of 1978. With money likely to remain tight, he forecast that the reluctance of richer regions such as Catalonia to continue subsidising poorer ones such as Andalucía would foment political disputes and regional nationalism.

“It’s an explosive situation,” he said, noting that the two available solutions – regional bankruptcy or the bail-out of a region by the central government – were both bad. “It’s a scenario that leads inexorably to a drastic reform of the system for public sector financing.”

An additional difficulty for Spain is the lack of up-to-date information on the debt and budget positions of the regions.

Economists said the headline number for the overall deficit was being improved, partly by cutting transfers from the centre to the regions and municipalities, while the regions’ debts are higher than the published figures because of billions of euros of unpaid bills to suppliers and “off balance sheet” debts incurred by public corporations.

“It certainly seems the central government is making considerable progress in controlling its own deficit but the same cannot be said of the autonomous communities and municipal authorities,” said Edward Hugh, a Barcelona-based independent economist.

“It is clear from everything we have seen to date that the underlying regional deficit is deteriorating rather than improving.”