As Spain has become mired in the euro zone crisis, its regions have been identified as one of its biggest problems, with many of them accumulating huge debts and deficits

SPAIN’S DECENTRALISED state is one of the most visible legacies of its transition to democracy in the late 1970s and early 1980s. The varying degrees of autonomy granted to its 17 regions were seen as proof of the country’s high-speed modernisation as it hurtled towards the 21st century.

But, more recently, as Spain has become mired in the euro zone crisis and the possibility of a sovereign bailout has loomed, its regions have been identified as one of its biggest problems, with many of them accumulating huge debts and deficits.

And the scale of that problem started to become apparent last month, when the north-eastern region of Catalonia announced it needed a bailout from the Spanish state worth €5 billion, in order to meet its debt obligations in the coming months.

The Mediterranean regions of Valencia and Murcia have subsequently said they will need similar, albeit smaller, rescues from Madrid. Other regions are considering making requests, with Andalusia saying most recently that it needs a €1 billion “advance” to cover costs.

For now, at least, the central government is prepared to cooperate, with prime minister Mariano Rajoy saying that his support for the regions “is due to the deep conviction that they have contributed to improving the wellbeing of Spaniards”.

“If one of the regions is allowed to fail, then the country as a whole will be failing,” says César Cantalapiedra, a partner at consulting firm AFI in Madrid. “The government is doing the right thing in trying to make sure none of them do fail. The problem is that this is difficult given the state some of them are in.”

The woes of the regions have helped keep Spain firmly in the eye of the euro zone storm. With the country also struggling at a national level to resolve a banking crisis and bring under control a jobless rate of 25 per cent, its borrowing costs have risen to unsustainable levels, prompting talk of a full bailout.

It’s no coincidence that the regions in most financial trouble, such as Catalonia, Valencia, Murcia, and Castilla-La Mancha, were among those that benefitted most from Spain’s decade-long property boom, which ended abruptly as the global recession hit in 2008.

Cantalapiedra explains that spending in those regions rose enormously during the bubble, with local governments generating extra revenue from taxes on real estate activity. When that came to a virtual halt, a shortfall between expenditure and available funds opened up.

Catalonia, whose economy is about the size of Portugal’s, has debt of €42 billion, while Castilla-La Mancha’s budget deficit last year was nearly 9 per cent of GDP.

The regions are responsible for more than a third of Spain’s overall spending. But they currently have relatively few means of generating revenue, such as through taxes, says Manuel de la Rocha, of the Fundación Alternativas think tank in Madrid.

“The expenditure areas the regional governments are responsible for, such as health and education, are very [politically] sensitive,” he says. “It’s not easy to make cuts to healthcare funding, for example.”

Those regions that have made substantial cuts to these areas, such as Catalonia, Castilla-La Mancha and Valencia, have seen an angry response from their citizens.

Rajoy’s conservative government has set a stiff deficit target for the regions this year of 1.5 per cent of GDP, which César Cantalapiedra expects them to miss.

He points out that virtually all of Spain’s regions have been locked out of international markets – a report of global competitiveness released last week by the World Economic Forum ranked the country 122nd in the world when it comes to gaining access to affordable financing. This means they must look to domestic banks for funding, or to the newly created FLA Regional Liquidity Fund.

Containing €18 billion, the FLA is going to be stretched by the current spate of bailouts being requested by regions, with Catalonia, Valencia and Murcia’s needs alone expected to consume over half that amount. Only three regions of the country’s 17 – Madrid, La Rioja and Galicia – have categorically ruled out tapping the FLA.

But even if the fund, which is not yet operational, can cover cash-strapped regions’ debt obligations, it won’t be able to cover other basic needs. In July, Catalonia postponed the payment of salaries of tens of thousands of health and social workers because of lack of cash. Scenarios like this could become more common if, as expected, Spain’s double-dip recession drags on.

Catalonia’s cash shortfall has emboldened the nationalist government there in its bid for increased economic autonomy from Madrid. Catalonia wants a similar fiscal status to that of the Basque country and Navarra, regions which, for historical reasons, are able to gather and spend their own taxes.

The lack of funds and surfeit of debt in regions such as Catalonia is a pressing economic priority for the central government. But as Manuel de la Rocha explains, Spain’s regions also present a severe political problem.

“There’s going to be a lot of tension over this,” he says. “The Catalans want to collect their own taxes, making them better off – but if they did, the rest of the country would be worse off.”