Rajoy further recentralises powers: Catalan Government to need permission to back companies

Barcelona (ACN).- In times of economic crisis, the Mariano Rajoy-led Spanish Government has been making recentralisation a main driver of its political agenda, using the economic recovery as the reason for passing the reforms. An additional step in this direction was taken on Monday with a new regulation forcing Spanish Autonomous Communities to seek permission from the Spanish Ministry of Finance before granting loans and guarantees to private companies located in their territories. From now on, Madrid's permission will be conditional upon the applicant's compliance with deficit targets. The new regulation substantially curbs the Autonomies' powers to shape their industrial policies, following a reform passed in May that modifies both the Organic Law for Financing the Autonomous Communities and the Organic Law on Budgetary Stability and Financial Sustainability. The Spanish Government justified this reform by emphasising the need to facilitate the financing of the welfare state, in order to ensure continuity of essential public services.

As noted by the Spanish business newspaper 'Expansión', with the introduction of the new legislation all financial operations carried out by the Spanish Autonomous Communities will be subject to the criterion of "financial prudence", having to meet reasonable terms of cost and risk.

This will be applied to operations such as granting public guarantees, contingent liabilities and other measures of extra-budgetary support, "to impede introducing financial uncertainty" and "causing serious unforeseen fiscal imbalances", according to the Spanish Parliament's press release justifying the new law.

On Monday, Spain's Finance Ministry confirmed that with the introduction of the new legislation the Spanish Autonomous Communities will be forced to ask permission from the Spanish Ministry of Finance before giving public guarantees to companies within their territory.

Communities' previous policies inspired by "political opportunism", Madrid says

According to the Spanish Government, the Autonomous Communities' previous policies with regard to granting loans and public guarantees to local companies "put their solvency at risk", and were often inspired by criteria of "political opportunism" or to help these companies avoid bankruptcy.

In the case of the Catalan Government, these public guarantees amounted to €2.7 billion, provided through public entities such as Avançsa (a public body for industrial promotion), which – for example – injected money into the airline Spanair before its bankruptcy.

Spanish newspaper 'Expansión' also recalls two other cases: the public guarantees granted by the Valencian Government to Valencia Football Club and those by Murcia's Government to an airport whose construction has been ongoing for two years but which has not yet been finished.

The newspaper also highlights that these three territories have constantly surpassed the budgetary limits set by the Ministry of Finance, and that 10 other Autonomous Communities have violated deficit limits. However, the article does not talk about the cases where companies went bankrupt after having been backed by the Spanish Government with guarantees and liabilities.

Madrid's centralised control over the Autonomous Communities' fiscal and industrial policies will be conditional upon their reception of liquidity measures such as the Liquidity Fund for the Autonomous Communities (FLA), a mechanism of loans for regional governments run by the Spanish Finance Ministry. Public guarantees for private companies shall not be provided by the Autonomous Communities if deficit limits, which are unilaterally imposed by Madrid, have been infringed. Instead of reforming the funding scheme of the Autonomous Community governments, which was designed before the 2008 financial crisis and expired in January 2014, the Spanish Government created this system of loans, which have to be returned and therefore increase regional debt.