Montero's debt forgiveness plan sparks tensions among regional governments

The Spanish Ministry of Finance and ERC have caused a rift in the Fiscal and Financial Policy Council (CPFF) scheduled for this Wednesday, where the central government and regional governments were set to discuss the details of the proposed regional debt forgiveness. This initiative, designed as a bargaining chip for Pedro Sánchez's investiture, was revealed in advance by ERC's leader, Oriol Junqueras, just one hour before Vice President María Jesús Montero disclosed the plan for all regions.

This early announcement triggered backlash from regional governments led by the People's Party (PP), which have united against what they deem an "unacceptable offer" and a "betrayal." PP leader Alberto Núñez Feijóo declared that all PP-controlled regions would vote against the Ministry's proposal, even though for some of these regions, like Andalusia, it represents a significant reduction in their debt.

The meeting on Wednesday, set to primarily discuss debt forgiveness, also faces demands from regional governments to address the reform of Spain's regional financing system. Last week, several regional governments had complained that they were unaware of the Ministry’s proposal, which Junqueras unexpectedly revealed earlier this week.

Junqueras stated that the Ministry of Finance planned to forgive 17.1 billion euros of Catalonia's debt, representing 22% of the debt owed to the central government through the Autonomous Liquidity Fund (FLA). Shortly after, Montero announced that the overall forgiveness would amount to 83.25 billion euros, distributed across regions primarily based on population, but with better terms for underfunded autonomous communities and those that haven't reduced income taxes.

This situation mirrors the events of November 2023, when the PSOE and ERC agreed on a debt forgiveness deal for Catalonia, initially only disclosing the amount for Catalonia (approximately 15 billion euros), later revising that figure upward. While both parties agreed to extend the debt forgiveness to other regions, the details remained unclear until recently.

The timing and the way the proposal was communicated have been poorly received by PP-led regional governments, which plan to oppose it in the upcoming CPFF meeting. Montero only needs one regional vote in favor (likely from Catalonia, governed by the PSC) to push the initiative forward.

In Madrid, President Isabel Díaz Ayuso criticized the proposal as "unacceptable," accusing Montero of "forcing all Spaniards" to accept a debt forgiveness deal negotiated with those responsible for "ruining Catalonia." Andalusia's Finance Minister, Carolina España, called it a "trap" and a "tailored offer for Catalonia" that would ultimately be paid for by the other regions.

The regional governments in the Valencian Community also labeled the proposal as an "insult," expressing frustration that the region would not receive compensation for its underfunding in the debt forgiveness plan.

Winners and Losers: The debt forgiveness formula benefits some regions more than others, depending on the criteria applied. Under the proposal, Andalusia (18.79 billion euros), Catalonia (17.1 billion euros), the Valencian Community (11.21 billion euros), and Madrid (8.64 billion euros) are the main beneficiaries in terms of gross debt forgiveness.

In terms of debt reduction relative to the size of the debt, the Canary Islands and Andalusia benefit the most, with their public debt nearly halved. Conversely, the Valencian Community and Catalonia see minimal reductions due to their larger existing debts.

If analyzed by debt forgiveness per capita, three distinct groups emerge. The first group, including the Valencian Community, Andalusia, Catalonia, Castilla-La Mancha, and Murcia, would receive the maximum forgiveness of 2,285 euros per person. The second group (Baleares, Extremadura, Aragón, and the Canary Islands) would receive around 1,500 euros per capita. The final group, including Asturias, Castilla y León, Galicia, Madrid, Cantabria, and La Rioja, would receive 1,370 euros per person.