José Antonio Zarzalejos.- 07/25/2012
According to sources within the Bank of Spain, the Spanish government will intervene in the finances of a majority of the country's 17 autonomous regions already during this summer, by providing financial aid from a government liquidity fund established by a law approved in July.
Three regions have already announced that they will request help from the government: Valencia, Murcia, and on Tuesday the regional government of Catalonia also confirmed it will request government funding, although the formal, detailed requests from these regions are still pending. Several other regions may soon follow, including, for instance, Castilla-La Mancha and Andalusia.
The rescue funds must be formally requested by the regional governments and approved by the Ministry of the Finance. The autonomous regions that comply with the requirements established in the law will get access to part of the €18bn that has been set aside for the liquidity fund, which is managed by the Instituto de Crédito Oficial, a state-owned bank attached to the Ministry of Economic Affairs, and that will be increased partly by an ad hoc loan from the state-run lottery organization (€6bn).
Financial and fiscal conditions
The intervention in the finances of the autonomies through this mechanism – which is temporary, until the resources run out – means that the government, through the Ministry of the Finance, will impose a number of financial and fiscal conditions described in the law on the regions, as well as keep track of the compliance with these conditions, which, in fact, neutralizes the economic and financial authorities in the regions that have been intervened.
The law which regulates the liquidity fund for the autonomous regions refers to two articles in the law for budget stability and sustainability, which describe the consequences when there is incompliance with the conditions, including the loss of autonomy following an absolute majority vote in the Senate, according to article 155 of the Spanish constitution.
A suspension of autonomy is the major coercive measure that can be taken against a region, according to Spanish law. As a consequence, the regions that receive aid from the liquidity fund know that they have been intervened; because if they don’t comply with the conditions for the loan, they risk their autonomy being suspended, and if they do comply, but still don’t have enough resources and resist to adhere to the system of liquidity, end up in default with unpredictable consequences.
Government model under criticism
To enter into this exceptional path with expiring debt payments will involve a budget adjustment plan, another plan for the treasury, a system of approval for autonomous agreements on spending and to cease control in situ to the ‘men in black’ from the Ministry of Finance.
Everyone is aware that the rescue of the autonomous regions will, in fact, mean a deactivation of the essential authorities of the regions and, as a consequence, a temporary, but efficient, seizure of the functioning of the government model in Spain, which has received enormous distrust by the markets. It has also been under constant criticism from the ‘troika’ and it has causes serious problems of coherence for the central government.
For instance, it could be seen in the government’s attempt to manage the economic crisis by decreasing the deficit targets of the autonomous regions for 2012 and in the following years, which four regions voted against it – Andalusia, the Canary Islands, Asturias and Catalonia – while two regions abstained – Castilla y León and Extremadura, both governed by the Popular party – and Galicia, although it voted in favor, was critical to the new targets.
Regions vs. central government
This attitude – which was encouraged by the premier of Catalonia, Artur Mas, who last week called on all the regions to jointly oppose the government’s initiative – has turned on the alarms in the government, which considers it the worst message to the potential investors in Spanish sovereign debt, now reaching record-high levels above 600 basis points, and with an interest rate above 7 percent on 10-year bonds.
The Catalan government, as well as the Andalusian, has already had to take loans to pay public sector employees in July and it has suspended payments to certain suppliers this month because of the lack of liquidity, which they say is due to the delayed transfers from the central government, which the government denies.
Among the 17 regions, Catalonia has the largest amount of debt. Out of the total amount of €11bn that must be paid to cover loans over the next months, Catalonia will have to make the major payments. Mas, who presides overConvergence and Union (CiU), a Catalan, nationalist center-right federation, that voted against the government’s austerity measures approved last week, had considered calling elections in advance if the region would have to request aid from the state rescue fund - which it now has announced that it will.
The only autonomous regions which seem to be out of risk of entering defaultare Madrid, the Basque country and Navarra, but “none of the others,” according to sources at the Bank of Spain.
Regions critical against state fund
The deputy premier of the government of Andalusia, Diego Valderas, said that to enter the mechanism of the rescue fund will mean “to move backwards 32 years.” Javier Fernández, the premier of Asturias, said that he prefers to request financial aid “from the bank” rather than from the central government.
These statements show that the intervention means that, to a certain point, the bubble has burst for the autonomous regions, and, probably, the beginning of a path that, sooner or later, will lead to the reformulation of the Spanish government model.
The political parties, however, did not stress that they would be giving up power to the central government, which could provoke a short circuit in the government model, neither when they approved the budget stability and sustainability law, nor when they approved the liquidity fund.
Weaker autonomous system
And although the government does not want to say it this way, it is certain that because of the crisis, the autonomous system will be weakened. It still remains to be seen if this rescue mechanism for the autonomous regions and a possible government crisis – particularly in the economic area – will be appreciated by the markets who may ease their pressure, as the European Central Bank has said it will not intervene to solve the sovereign debt crisis in Spain.
The government is not considering new budget cuts nor new adjustments – apart from those that will change the public administrations, especially that of the autonomous regions and the regional companies and foundations – given the strong response from street protesters, who give much responsibility to the regions for the financial imbalances, but who may not know that the foundation of the very system has failed, because some spent with limited control (the autonomous regions) while others collected and transferred (the central administration). The system, now, has collapsed.
This article was translated and edited by Stina Lunden. It is available in Spanish here.
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