Withdrawal of the FLA, a threat to Catalonia... and Spain

The Spanish government’s spokesman, Íñigo Méndez de Vigo, made a highly significant announcement: his government is prepared to allow Spain to default on its debt repayments, a situation which would have unpredictable consequences for everyone concerned, not least for Spain itself.

Méndez de Vigo made the announcement last Friday. The Catalan government’s finances will be subject to weekly audit, and if it is revealed that money is being used to organize the referendum on 1 October, Madrid will no longer finance Catalonia’s government via the Regional Liquidity Fund (FLA, in Spanish). If this were to occur, it remains to be seen whether the Catalan government, in the absence of state funding, would be able obtain money from the financial markets. As ARA reported some time ago, the Catalan government has been considering the possibility of pulling out of the FLA for several months, but it is not clear whether it could do so at such short notice.

If central government were to cut off funding via the FLA and the Catalan government were unable to obtain financing from international debt markets, the Catalan regional administration would almost inevitably default on its repayments.

Such an exceptional situation would have multiple consequences.

First of all, the Catalan government’s employees and suppliers might stop receiving a part (or all) of the monies owed to them. The government would continue to owe them money, but due to a shortfall in funding, it would be unable to pay them on time.

Meanwhile, the Catalan government’s creditors would cease to receive some (or all) of the money owed them. This is where things begin to get complicated: the Catalan government’s debt currently stands at €7.5 billion, two thirds of which (slightly over €50 billion) is owed to the Spanish state, according to Bank of Spain figures. Therefore, if Spain were to cease to fund the Catalan government via the FLA, the latter would stop paying its creditors, the largest of which is Spain itself.

To give one an idea of just how much cash €50 billion is: it is the same amount Spain asked the so-called ‘troika’ for, to bail out its banks.

There is yet another factor. Although it would mean the Catalan administration was failing to repay its debts, the debt issued by the Catalan government is underwritten by the Kingdom of Spain. As a result, it is highly likely that if repayments of Spanish public debt were halted, it would end up affecting the issue of debt financed by Spain itself. Spain’s reputation in the financial markets would be tarnished. As a result, the interest it pays would rise.

One detail must not be overlooked: at present, such an event remains nothing more than a threat, since its objective is to deter the Catalan authorities. However, having examined the consequences, it is hard to imagine that such a decision would actually be taken.

All this fuss over a referendum.