Spain | Regional Government Debt (II)

Summary

The FLA allowed regional governments access to financing on favourable terms. However, its costs should lead to changes in its design and implementation. Governments that have not accessed the FLA have helped reduce the risk premium, are financed at lower rates than the Treasury and are growing more.

Key points

• Key points:
• The Autonomous Communities that have resorted to the FLA (Spain's Regional Liquidity Fund) have received a subsidy to meet their financial burden.
• Recourse to the FLA implies a series of conditions and obligations that may limit the regional governments' actions in their revenue and expenditure policies, which has supported the reduction of the regional deficit.
• Some of the costs associated with the FLA are: an increase in the risk premium on Treasury issues, a redistribution of resources between public administrations that is less and less justified, the possibility of generating undesired behavior given the dependence on the State, and the reduced attractiveness of undertaking reforms.
• On the other hand, the financial cost of being outside the FLA is transitory and reduced, while the benefits will be greater for these regional governments, given that they have contributed to reducing the Spanish risk premium, they will enjoy better financing conditions in the medium and long term and their exposure to capital markets potentially creates incentives to implement reforms.
• This note is part of a series aimed at assessing the current situation of regional debt and its sustainability. The first report is available here.

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