The crisis in the regional governments

Spain’s regional governments have entered into a phase of acute financial crisis whose first and most serious consequence will be a new deterioration of investor confidence in the solvency of the Spanish debt.

On Tuesday, Catalonia announced that, like Valencia and Murcia, it will also resort to the Regional Liquidity Fund, needing money to refinance the almost 5.5 billion euros’ debt falling due in the second half of 2012. Technically, recourse to the Liquidity Fund is not a state bailout: but the fact that the money the regions need will require severe adjustments in exchange makes it similar enough to a bailout.

The real financial situation of the regional governments is one of liquidity collapse. The slump in tax revenues and the absence of continued adjustment programs explained this grave situation at the beginning of the crisis. Besides, there is the decisive circumstance that the international financial markets are closed to Spanish institutions. But it must be remembered that for many years the regional governments have systematically acted in disregard of their own economic-financial programs, swelling their debt with the complacency of successive national governments, who for political reasons or out of mere apathy neglected to demand strict compliance with commitments to deficit control.

What really conveys a deplorable impression to public opinion and to the investors whose confidence needs to be recovered, is the chaotic relation between the central and regional governments. It appears that the requests for recourse to the Liquidity Fund have caught the central government off guard, it being poorly informed of the financial straits of the regions. In so tight a corner it is an extravagance to even discuss a fiscal pact for Catalonia. The image of non-coordination and trifling does not exactly help to reduce the risk premium, or to push down the yield on the benchmark 10-year government bond. Errors such as these have brought the economy to the anteroom of a full bailout.

Amid this regional financial collapse, it appears that the Liquidity Fund, initially equipped with some 18 billion euros, guaranteed or forwarded by the banks based on the resources of the state lottery company, has not even been constituted, with the available capital pending an agreement with the banks. It is a question of sheer survival — such as concluding at last the banking reform, or organizing a credible stability plan for public finances — that the Finance Ministry must sit down with the regional governments, learn once and for all how much money they need to refinance debts that are due, and conclude the negotiation with the private banking industry to finance the fund.

The regional crisis has festered simply because the government has been unable to answer the question as to what is the real situation of regional government accounts. And lack of an answer, among other causes, is leading us into a dead-end situation.