Regions on credit watch

The international rating agency Standard and Poor's announced today it would downgrade the credit ratings of four Spanish regions if they did not moderate the spending in an environment where revenues have shrunk because of the construction halt. Cities and regions lived a time of economic bonanza during the years of the construction boom as they earned revenues from the sale of the land to promoters. The time of spending ecstasis is now over and regions have to control their leverage if they want to avoid a further deterioration of their credit standings.

The regions under credit warning included Madrid, Valencia and Catalonia. Valencia is the most indebted per-capita region in Spain. The region has been ruled by the Popular Party since 1995, when Benidorm Mayor Eduardo Zaplana became President of the Generalitat Valenciana, the regional government. Eduardo Zaplana was subsequently substituted by Francisco Camps, the current President that many credit with the region’s vanguardist vision enhanced by Santiago Calatrava’s phenomenal architecture. Last summer I had the opportunity to meet with Generalitat’s director of grand projects Jose Luis Villanueva and with IVIE’s (Valencia’s economics institute) chief economist Joaquin Maudos. The region’s strategy has been to finance large infrastructure projects increasing the region’s debt to an extent that it is now the most indebted in the whole of Spain. The vision of grand projects has recently continued with the America’s Cup and the grand prix of Formula One.

Madrid’s Mayor Alberto Ruiz-Gallardon, one of the finest politicians on the right-wing Popular Party is as much of a supporter of political consensus and dialogue, as he is a supporter of grandiose projects that include the subway ring south of Madrid called Metrosur or the recent reform of Madrid’s inner highway ring M-30. Gallardon typically counts on the support of a majority of his fellow citizens that have approved his spending ecstasis that have brought about a renaissance of Madrid’s once poor southwest on the bank of the Manzanares River.

Camps and Gallardon seem to count on the support of their fellow citizens. Madrid and Valencia’s spending cycle may be on the verge of a slowdown. In an environment where revenues are decreasing rapidly, expenses must be monitored and controlled. The citizens in both regions are likely to suffer at the same time that they will benefit from heavy investment in infrastructure that as a public good is enjoyed by each and every citizen independent from their income level.

Catalonia is however in worse shape because of its persistent blackouts and train delays. The region was the envy of the rest of Spain in the 1980s, with a plethora of toll highways that have become obsolete today. The regional government of Socialist Jose Montilla, who rules in coalition with two left-leaning parties, has continued to demand more autonomy in the management of the regional infrastructure, including airports and trains. More autonomy is however not a sinonym for more efficiency or better management. Montilla, a high school graduate without college education, was Minister of Industry in the first Zapatero administration. Born outside of Catalonia, he has moved from being Zapatero’s puppet to demanding more autonomy, a wish Catalans have asked non-stop since Leopoldo Calvo Sotelo was appointed Prime Minister back in 1976. The Catalan Popular Party is along Citizens (Ciutadans) the only non-nationalist party that still remains in Catalonia. The region’s thirst for autonomy has forsaken equally important issues such as the management of public goods, that in other regions, namely Valencia and Madrid, has worked far better because of more stable and longer-term governments that rule more in consonance with a majority of the population. Barcelona breathes the freedom I have only experienced in California, but perhaps in expense of a worse delivery of public duties on behalf of civil servants.

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