Fitch lowers Catalonia’s debt rating despite recognising the efforts to reduce the public deficit

Barcelona (ACN).- Fitch reduced the rating of Catalonia’s long term debt this Wednesday because of “the expected weak economic growth”, at the same time it recognised the efforts carried out by the Catalan Government to reduce the public spending and public deficit. The Paris-based rating agency with US capital reviewed the debt of five Spanish Autonomous Communities, all of which had their long term debt rating lowered. Catalonia’s long term debt passed from A to A-, which is the lowest rating which is still considered as within the “good” category. Together with Catalonia, the Valencian Community, the Region of Murcia, Andalucía, and the Canary Islands have also seen their long term debt’s rating reduced. The five other Communities that are regularly analysed by Fitch will have their results in some days, but Fitch stated that the perspective for the whole of Spain and the Autonomous Communities is negative. The reason for this is the generalised economic slowdown that delays economic recovery. Fitch also focused its analysis on the Autonomous Communities’ approach to their deficits and their ability to meet their commitments, which have raised many doubts. The Catalan Government understands that Fitch rating is influenced by “the international situation”, within “the frame of generalised reductions of rating”. In addition, sources from the Catalan Ministry of Finance emphasised that efforts to control public deficit are already made, as Fitch recognises.

The Catalan Government’s deficit for 2011 is expected to reach 2.6%, as Catalonia did not agree on the 1.3% commitment of other Autonomous Communities. The Catalan Government always insisted that its deficit would not be reduced to 1.3%, as it cannot cut public spending beyond 10% in only one year without drastically affecting basic services such as healthcare. After the first 6 months, the Catalan deficit was 1.01% according to the Spanish Ministry of Economics. The Catalan Ministry of Finance is completely confident to reach the 2.6% objective.

Furthermore, as the Catalan Government has reminded on several occasions, the Autonomous Communities’ funding depends on transfers from the Spanish Governments; and some of these transfers are missing. If the Spanish Government paid some of these transfers, such as the money from the Competitiveness Fund for 2011, the Catalan Government would reduce its deficit beyond 2.6% and would be in a position to reach a deficit of 1.3%.

In addition, in the case of Catalonia, there is an added problem, the so-called fiscal deficit. Catalonia suffers from a fiscal deficit of around 9% of its annual GDP, representing around 18 billion euros that are given to the rest of Spain in terms of solidarity. The Catalan Government is asking for this enormous fiscal effort to be reviewed, in order to continue with inter-regional solidarity with limitations, resulting in a significant reduction of the fiscal deficit. The Catalan Government often reminds that Catalonia’s public deficit for 2010 was 3.86% of the GDP, representing some 7.6 billion euros. If Catalonia’s fiscal deficit of 18 billion euros was halved, Catalonia’s finances would be balanced and approaching a budget surplus.

Fitch recognises Catalonia’s efforts to reduce public deficit

Fitch has reviewed the debt of five autonomous communities and made a particular emphasis on the efforts made by the Catalan Government, run by the Centre-.Right Catalan Nationalist Coalition ‘Convergència i Unió’ (CIU), to reduce public deficit and adopt austerity measures over public finances. The Catalan Government is cutting public expenditure by 10% over 2011, which differently affects all government departments. However, Fitch stated that economic growth will be weak, and therefore fiscal revenues will be affected. In a scenario with less revenue, controlling the public deficit is harder.

In addition Fitch stated that Autnomous Communities need “stronger efforts particularly to control spending”. Some Autonomous Communities started to reduce their public spending at a later stage than Catalonia, which had already presented its budget austerity plan last winter. These other Autonomous Communities held elections last May, and incumbent governments delayed the budget cuts. The overall reduction of the Autonomous Communities’ debt “reflects the experimented fiscal deterioration” of the last years, which has provoked “a significant growth of debt levels”, according to Fitch’s report.