The management of the debt of the Community of Madrid has caused a tough clash between the PP and Más Madrid this Thursday in the Madrid Assembly. The party that leads the opposition to the government of Isabel Díaz Ayuso has recalled that the AIReF warned Madrid in July that it sees “a risk of non-compliance with the spending rule in 2024” —which happened in 2019— and has denounced during the plenary session that the region has paid almost one point more in interest for the debt issued between 2012 and 2022 by deciding to go to the markets to finance itself instead of taking advantage of the regional liquidity fund (FLA), which translated into 2.8 billion. In contrast, the Minister of Finance, Rocío Albert, has defended the government strategy, with the support of Vox, and without going into the details of the data other than to discredit the calculation method (“Don’t you take into account the times, the maturities?”).
“The councillor tells us that we are lying, but she doesn’t give a single figure of how much it costs us not to go to the FLA. And do you know why she doesn’t say it? Because the number embarrasses her,” said Alberto Oliver, a deputy for Más Madrid. “Thanks to Más Madrid we know that the decision not to go to the FLA has cost us a total of 2.8 billion euros in additional interest,” he accused while Albert smiled when listening to him. “It’s like being granted a mortgage at 1% and asking for it to be raised to 1.25% to pay more,” he exemplified. “What worries me is that each Madrilenian has to pay 400 euros more.”
A thesis that the PSOE representative, Fernando Fernández Lara, agreed with. “We could have turned to the FLA for the debt maturities,” said the deputy about an opposition to resorting to this mechanism that he considered “capricious.” And he added: “These are absurd decisions, damaging to the Community’s assets.”
What is certain is that successive PP governments have shown themselves to be against resorting to this mechanism because, from the very beginning, back in 2012, it allowed the Ministry of Finance to propose the modification of its adjustment plans or to entrust the General Intervention of the State Administration with “the exercise of control missions in the event that risks of non-compliance are detected”, that is, the much-feared bailout.
“We have not financed ourselves in the FLA and we are not going to do so because we want to continue financing ourselves in the capital markets,” countered Minister Albert. “I am going to tell you what the First Vice President, Mrs. Montero, and Mr. Cuerpo, Minister of Economy, say: they think it is better to finance ourselves in the markets,” she recalled. “Our economy has a strength that contributes to the fact that we do not need the steroids of the FLA,” she ironically said. “Allow me a little advice, stop lying to the people of Madrid,” she continued. And on the figure of 2.8 billion, she said: “Do you not take into account the times, the maturities [en sus cálculos]?”.
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Financial cost
“We don’t pay any more interest [por acudir a los mercados en lugar del FLA]”, a government spokesman adds. Madrid also recalls that one of the arguments used by the Treasury to justify the announced reduction of 15 billion euros from Catalonia’s debt is that this region can go to the markets and abandon the FLA. In other words, so that it can do what Madrid is doing, whose fiscal strategy is at the centre of the controversy.
In this regard, a BBVA report from January concluded that “not resorting to the FLA has entailed an opportunity cost.” But it qualified: “However, this should be temporary.”
The authors, Virginia Pou and Pep Ruiz, stated via email that “the use of the FLA implies a series of conditions and obligations that may limit the actions of regional governments in their income and expenditure policies, which has supported the reduction of the regional deficit.”
These associated costs, they add, include “the increase in the risk premium on Treasury issues, a redistribution of resources between public administrations that is increasingly less justified, the possibility of generating undesirable behaviour given the dependence on the State and the reduction in the attractiveness of undertaking reforms”. In contrast, opting for the Madrid route, and not resorting to the FLA, has “a temporary and reduced financial cost, 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”.
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