At the Core of the Sovereign Crisis in Spain: Restructuring Subnational Debt vs Internal Bail-Out

Abstract

Spain´s sovereign crisis has many sides and causes. An unviable economic model and an insolvent financial sector generated a private sector crisis that rapidly spread to the Government´s balance sheet. The public sector itself had –and continues to have- its own serious dysfunctions. One of the main problems lies with Spain´s territorial administration. Subnational entities, in deep financial trouble since the onset of the crisis, are tasked with the provision of the most essential public services, and, as a consequence, the application of strict austerity measures on the regions has caused severe pain on citizens. Social discontent has been used by local politicians to agitate separatism. The situation has generated uncertainty about Spain’s future, posing additional hurdles to the country’s economic recovery. Mirroring the approach adopted by the EU towards its troubled sovereigns, the Spanish Government has mainly confronted the problem of subnational distress by means of fiscal transfers (bail out). In this paper, it will be argued that this highly complex problem demands a comprehensive approach and adequate focus. We argue that an amendment to the current fiscal system to enhance tax autonomy and regional self responsibility ought to be considered; we also argue that a restructuring of the subnational debt would (i) discharge the central government of a sizable amount of debt, (ii) allow the normal market dynamics to work to a fuller extent and, more importantly, (iii) alleviate the pressure on the regions, that could resume rendering basic social services at acceptable levels, stripping at the same time nationalistic Governments of their main argument to dismantle the country in their own benefit. The reduction of the general debt burden and the softening of the territorial tensions would place Spain in a much better position to fully recover from the crisis.