August 30, 2012
In today’s City AM we look at what Catalonia’s decision to request a bailout from the Spanish government means for Spain, its Prime Minister Mariano Rajoy, and the eurozone. Here it is:
Catalonia’s decision to seek a bailout from the Spanish government was just a matter of time. With over €5.7bn (£4.5bn) of debt maturing before the end of the year, Spain’s wealthiest – but also most heavily indebted – region had very little chance of paying its bills without some form of external assistance. The request is going to be a huge test of Prime Minister Mariano Rajoy’s mettle.
Despite asking for a loan of over €5bn – that is, almost one third of the money the Spanish government has earmarked to help all 17 of the Comunidades Autónomas – the Catalan government has so far shown no signs of graciousness towards the central government.
In fact, a Catalan government spokesman provocatively told the press that Catalonia will not even say “thank you” to the Spanish government for its help. The logic being that the money the region is going to borrow was Catalan taxpayers’ money in the first place – previously confiscated in order to pay for transfers to the rest of Spain. Most importantly, Catalonia has said it will reject any “political conditions” and has no intention to make further cuts to meet the deficit target imposed by the central government for this year.
The upcoming negotiations over the details of the bailout will therefore turn into a key credibility test for Rajoy, on two fronts. Domestically, his government simply cannot afford to display any weakness throughout the talks with the Catalan leaders. If Rajoy rolls over for Catalonia, other regions will feel encouraged to claim their share of cash from the central government, with little or no strings attached.
This will raise questions over whether the €18bn in the bailout fund set up by the Spanish government to help cash-strapped regions is going to be enough. At this stage, half of the money in the pot has already been committed, with only three of the 17 regions deciding to tap the fund, so far.
At the European level, the Spanish government desperately needs to prove that it is capable of reining in the regions’ spending. As European Council president Herman Van Rompuy recalled during his visit to Madrid earlier this week, internal problems resulting from the way the Spanish state is organised are not Brussels’s, but Madrid’s. In other words, domestic inter-regional Spanish politics will not be considered a valid justification for Spain missing its EU-mandated deficit targets once again.
With the markets broadly expecting Spain to ask the Eurozone’s temporary bailout fund, the European Financial Stability Facility, to start buying Spanish bonds in a bid to reduce its unsustainable borrowing costs, the Spanish government needs to make sure that it comes out of the negotiations with Catalonia in a position of strength.
Author : Open Europe blog team
If, on the other hand, Rajoy is shown to be unable to exert control in his own backyard, his negotiating position in Brussels will surely be weakened – and his Eurozone counterparts will be increasingly reluctant to take his promises of reform and fiscal consolidation seriously.