The Catalan Bailout
Written by XSiM
For months, all major Spanish companies such as Telefónica, Gas
Natural, Abertis, ACS, etc, have had the international financial markets
closed. That is, private investors do not want to lend them money at
any price. And this is independent of the sector in which they operate
or the state of their economic health (after all, they all have run out
of credit regardless of your industry and the state of their finances).
The reason is simply that they are Spanish: investors think that the
possible collapse of the Spanish economy puts Spanish corporations at
risk of collapse and, therefore, they optimally choose not to lend them
money. And that is true even if some of these companies (such as
Telefónica or Natural Gas) derive most of their revenue from outside
Spain. Moody's said it clearly makes a couple of months "Telefónica's
rating can only be a step above the rating of the government of Spain."
Between 1997 and 2003, when Jordi Pujol presided over the Generalitat,
total debt remained relatively constant euros (just up from 9,200
million to 10,900 million euros) and, because GDP rose very rapidly due
to the housing boom, the debt to GDP ratio fell from 9.7% to 7.4%.
I say this because the Catalan Government
has officially announced that it will request access to the Liquidity
Fund,a fund that will be set by the Spanish government to help regional
governments in financial distress. Catalunya said it would ask for
5,023 million euros. Although this decision has caused much media
coverage, it is not the first time that the Catalan government applies
for state funds. A couple of months ago it requested loans from ICO).
Why? As most major Spanish companies that lost access to international
private capital markets, Catalunya has lost access to bank credit.
Hence, it has no other choice but to borrow from the state rescue fund
created for such occasions.
Some (anticatalan) analysts have been
quick to point to the Catalan embassies (especially the one New York),
the budget of the Ministry of Culture and the alleged extravagance of
the Catalan public TV, TV3, as culprits for Catalunya’s financial
collapse. These arguments do not merit discussion because the size of
these items is ridiculously small compared to the magnitude of the
fiscal problem. However, it is relevant to ask: How did Catalunya end up
here?
Part of the explanation can be seen by
simply analyzing the evolution of total debt since 1997. I begin in 1997
because many analysts believe that year to be the beginning of the
housing bubble. The first graph (above) shows the total debt of the
Government in millions of Euros. The chart below shows the deficit of
the Government relative to GDP. The source of both graphs is data from
the Bank of Spain (links to total debt and debt relative to GDP).
Between 1997 and 2003, when Jordi Pujol presided over the Generalitat,
total debt remained relatively constant euros (just up from 9,200
million to 10,900 million euros) and, because GDP rose very rapidly due
to the housing boom, the debt to GDP ratio fell from 9.7% to 7.4%.
Between 2003 and 2008 (during the
triparty government Pascual Maragall and the frist two years of José
Montilla), total debt increased from 10,900 to 15,776,000 euros, even
though the economy was experiencing a major economic boom. And that is
the first lesson to be learned. During good times governments should
save money so that they have reserves during bad times. This is
especially true during housing bubble. The reason is that all bubbles do
come to an end. Hence, governments must realize that these episodes
their tax revenues are abnormally high and, therefore, they should not
commit to high permanent spending.
However, instead of saving, the Catalan
government squandered the temporary windfal. And not only that, it spent
much much more than it collected to the point that its debt increased
by almost 50%. We all know the waste list: construction of airports with
no plains and other absurd infrastructure, massive waste in a useless
Forum of Cultures, increased health spending as if the boom were to last
forever, government hiring friends, relatives and political affiliates,
advertising campaigns for electoral purposes, metro stations decorated
by the the world’s best and most expensive architects and designers, and
even a “sustainable” minister designing his own office building Feng
Shui-style (with a total cost of 42 million euros of taxpayers’ money).
In short: a shameful display of scant respect taxpayers and their money.
All this continued until, of course, the
bubble burst and the recession arrived. It was the second half of 2008.
The crisis involved plummeting tax revenues. As the Government had
committed to large spending and it didn’t take the recession seriously
(so it did not cut back), public debt shot through the roof: from 15,776
in 2008 to 34.229 million euros. The debt when President Montilla left
had doubled during his fours years in office and tripled the debt when
his party arrived at the Generalitat in 2003. As a percentage of GDP,
Catalan debt had increased from 7.4% to 17.3%.
Artur Mas came to office in 2010.
Although he quickly embrace German austerity, debt has continued to grow
and has now reached 42,000 million (21% of GDP) according to the latest
figures from the Bank of Spain. How can that be? Well, as I have
explained many times in this blog, austerity, no matter how necessary it
may be in the medium and long term, tends to deepen economic
contractions in the short term. Hence, the austerity imposed by the
Catalan government has worsened the recession and, therefore, public
revenue has continued to fall. If, on top of that, the interest payments
increase because the risk spread and because total debt is bigger, we
have that public debt continues to rise despite the austerity measures.
Looking at the data, however, it is true that during the first few
months of 2012 debt seems to have stopped its exponentially growing
trend. We'll see how it ends.
Conclusion: the first main cause of the financial situation of the Catalan Government is the Catalan Government’s wild
extravagance and its inability to save during the bubble year. Catalan
citizens must understand that the level of public spending (health,
education, cultural, academic, infrastructure, etc.) reached in 2007 was
not sustainable and must be reduced going forward.
That said, the increase in debt
experienced by Catalunya, whether it was caused by mismanagement or not,
can not by itself explain the loss of access to capital markets by
Catalonia. After all, a public debt to GDP ratio of only 21% is very
small compared with the debts of all countries in Europe and almost
every country in the world. Yes, I know that Catalonia is not an
independent country and if it were, it would have face more obligations
and, therefore, more spending (the share of spending that is now faced
by the Spanish state). But it would also have more revenue. In
particular, the revenue which now goes to the central administration to
pay those obligations as well as all the money that now goes to the
“solidarity funds” that subsidize other regions. Hence, if Catalonia was
an independent state and its government debt were only 21% of GDP and
if, in addition, its deficit was between 1.5 and 3% of GDP (as it is
now) it would be considered one of the healthiest economies the world
and the financial markets would be fighting to lend it money. Why don’t
markets, therefore, want to lend to Catalunya? The reason is simple:
because it is not an independent state. Instead, it is part of Spain.
And this simple fact has at least three important consequences.
First, for reasons that are beyond all
rationality, the government of Spain has been telling everyone that the
main culprit of Spain’s budget deficit are the regional governments.
This, in spite of the fact that 60% the total deficit corresponds to the
central government! And of course, by repeating this mantra over and
over again in all international forums, the markets have turn off the
tap to ... (surprise??) the Regional Governments!
The second consequence of being part of
Spain is that markets know that the taxes paid by citizens and
corporations in Catalonia are not managed by the Generalitat. Instead,
the money goes to Spain and it is the Spanish government that decides
how much money goes back to Catalunya. It is estimated that, on average,
only 60% of the axes paid by Catalan citizens and businesses goes back
to Catalunya after the central government “redistributes” revenue across
regions.
Obviously, if Catalonia was an
independent state, its fiscal revenue would have been reduced during the
recession. This happens to all countries. The problem of Catalunya is
that, on top of that, it suffering falling revenue from a grim
regional-financing system that allows up to 40% of the taxes collected
in Catalonia disappear. As the Telegraph (a British Newspaper) puts it: “the
Catalans have been forced by the perversities of Spain’s tax system to
request a "rescue" even though they subsidize the rest of the country!”
The problem is that the markets do not see an end to this situation any time soon.
How would Catalunya have performed had it
been independent? Hard to say. But maybe it is worth spending a few
minutes analyzing the performance of another region, with a different
financing status (it does not have to give all its revenue to the
central government) and a similar level of commitments (education,
health, police, etc.): The Bask Country.
In 1997, the difference between the
Catalun and Basque debt to GDP ratio was about 2 percentage points (10%
of GDP in Catalunya vs 8% in the Basque Country). By the time the
recession started in 2007, that gap had widened to 7 percentage points
(8% vs 1% in Catalunya Basque). From then on, the debt of both regions
soared (which shows that if Catalunya had the same system of the Basque
Country, Catalan revenues would have fallen because of all public
revenues of all economies do) but clearly the stock Catalan debt
increased much more than that of the Basque country: in 2011 the
difference reached 12.6 percentage points. Catalan austerity slowed the
growth its a bit so the difference with Basque debt in 2012 has been cut
back sharply to 10.8 points. Hence, if Catalonia had had a funding
mechanism similar to Basque country, its debt would have increased due
to the bursting of the bubble,... but not to the levels that it actually
reached.
The third consequence of belonging to
Spain is the Spanish brand itself. Which brings us back to the big
companies like Telefonica, Natural Gas or ACS, all of which have
exceeding difficulties in finding financing abroad simply because they
are Spanish. The problem is that being part of Spain at the moment is an
expensive scourge as the entire world witnesses the deterioration of
the Spanish political and institutional environment: the King is caught
hunting elephants with a young German lady while his compatriots suffer
the consequences of the recession, his son-in-law has been charged with
corruption and embezzlement, the chief justice of the Supreme Court has
been forced to resign because it used public money to finance romantic
weekends with his bodyguard, the worldwide famous Baltasar Garzón, also a
member of the supreme court, forced to resign for spying on lawyers,
the Bank of Spain carried stress tests and gauged that Bankia was safe
just months before it collapsed. The CNMV (a supervisory institution)
allows Bankia to go public even though it had information that it was
insolvent, causing thousands of citizens to lose their lifetime savings
as they rush to invest in this bank. The president of the CEOE
(association of businessmen) Gerardo Diaz Ferran, charged with corporate
fraud. The country’s principal banker Emilio Botin, boss of Santander,
caught with a secret account with 2 billion euros in Switzerland.
Governments of all parties doing the exact opposite of what they
promised during their political campaigns. The current government
postponing the presentation of the most important budget of the
country‘s history in order to win a regional election in Andalusia. It
is no wonder why, after witnessing the spectacular collapse and
discredit of virtually all Spanish institutions, investors believe it is
unsafe to lend to Spanish corporations and regional governments.
In short, despite the undeniable
mismanagement by the Catalan Government during the boom years, the truth
is that the incompetence and disloyalty of the central government, the
faulty system of funding regional governments and the international
spectacle of disrepute on the part of key Spanish institutions made the
need for a Catalan bailout all but guaranteed.
Many Spanish pundits say that the bailout
demonstrates the failure of the growing Catalan indepedentist movement.
I disagree. I’d say that the bailout is a win for independentists as it
shows that Catalunya within the current Spain is unfeasible. And so is
Spain.
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