Published on Monday, November 13, 2023

Spain | System of financing rather than forgiveness

The aim of debt forgiveness should be to reduce excessively high financial costs which may jeopardize the solvency of public administrations or the provision of certain services.

Key points

  • Key points:
  • However, to prevent the beneficiary from engaging in the same behavior again, a new institutional framework is also needed. Doing the former without the latter would be a useless, costly and counterproductive exercise.
  • The Autonomous Community Liquidity Fund (Fondo de Liquidez Autonómica, or FLA for short) was already a first attempt to limit the increase in financial costs. Its implementation was prompted by the perception that some regional governments had no more room to reduce expenditure or increase revenues without harming the provision of critical public services or negatively affecting economic activity.
  • The regional governments have accessed financing below the market price, considerably reducing the cost of interest payments. In a recent document, BBVA Research pointed out that regional debt could have been 2 pp of GDP, had it been necessary to borrow at higher rates.
  • Given the presence of the FLA, the cancellation of autonomous community debt is not something necessary or urgent. The important thing is to ensure that regional governments do not revert to this situation.

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