Council Bankruptcy

by xabier

Local authorities in Spain have large amounts of debt, but this debt is not homogeneously spread throughout the country, and bankruptcy is (why not?) a serious threat for some of them. Or, even worse, for everybody in Spain. This is a short analysis of council debt figures in Spain and Galicia.

I have no idea about economics. But I have no responsibilities in government, therefore my lack of knowledge is not a big issue. I can take decisions adviced by the geese flight, or by tea leaves, or by my own feelings: when I wake up optimistic I can see green shoots all around, and when I wake up pessimistic I believe that Europe, but particularly some little bits in it, are running downhill faster and faster. However, everybody knows that gambling has a high level of risk, and that knowing real numbers help us to decide about launching a new company, buying a car, or having children. Eventually, our future happiness depends on the quality of the information underpinning our decisions.

Debt figures for every council and local authority in Spain (2008) have been published by the Spanish government. There are some worrying numbers on those tables, but they only refer debts with banks, and a large amount of commercial debt is not taken into account. This kind of numbers are not affecting our decision of buying a new car, but maybe they can help us to decide that there are better countries than Spain in order to have children. Let’s see some of those figures.

Councils in Spain have very limited resources. Most of them are small villages of just a few hundred inhabitants, two crossing streets and one café-pub-butcher-ironmonger-shop. No services and no cost, apart from cleaning the city hall, if there is a building for that purpose. But also larger councils and important cities have serious difficulties to get funding, and in most cases the service’s price is not enough to pay the activity’s cost. This lack of cash has pushed some of the councils’ activities over the recent years, from renting public spaces for car parks, to increasing their debt levels: Spanish councils have a total debt of 26,128 million euros.

The city of Madrid is a case study itself. Danny DeVito, when he was in Madrid launching one of his films, was asked about the city. He answered that Madrid would be a great place when the treasure was found, and he also hoped they find it as soon as possible. He was talking about a well-known epidemic of public works, an important factor of the Madrid brand around the world. My husband supports the major of Madrid every time this topic is on the table: without investment there is no benefit, without debt there is no investment. And that is true, at some extent.

I don’t know if they have spent that money investing in Olympic bids (a ruinous business as soon as the proper literature is reviewed), in public works or in I+D initiatives, but the results are there: no Olympics, large rates of unemployment when the building and construction sector has collapsed, and a hard future in the horizon. And loads of debt. 6,684 million euros, 25.6% of total debt of Spanish councils and a debt per inhabitant of €2,080 at the end of 2008: every Madrid inhabitant should pay 1.5 times the monthly medium wage for balancing the Council chest.

Sadly, that will never happen. When banks will say enough, money will be not paid by Madrid citizens, who have voted for a gambler major, but for every Spaniard. Why so large loans have been given by banks far beyond the ability of Madrid Council to pay the money back? It would be interesting to know which are those banks, and if Cajamadrid, a semi-public bank partially controlled by the Council, has received a big part of the pie.

Madrid has the largest debt, but not the only one. In the top-10 of council debt are seven cities placed in the Mediterranean area: only Madrid, Zaragoza (where a delirious and unsuccessful Expo was organized in 2008), and Valladolid belong to another economic axis.

Top10 of council debt in Spain (2008)

Top10 of council debt in Spain (2008)

All of them are big cities, and Zaragoza and Málaga have a debt per inhabitant over € 1,000, but they are still quite far from Madrid. But which local authority has the largest debt in Spain? This is the top-10 per inhabitant.

Top10 of council debt per inhabitant in Spain (2008)

Top10 of council debt per inhabitant in Spain (2008)

Apart from Fuendetodos, a small village where Goya, the painter, was born, I bet that any of the readers know any of these local authorities. Only Almensilla has more than 300 inhabitants (5,438, to be precise). But how on earth a council of 32 inhabitants (Palo) has a debt of €201,000? It is also surprising that all these councils (apart from Almensilla, again) are located in a very small region of Spain close to the French border. I would need some clues for moving this question out of the X-files box.

Council debt's map. In red, the top10 in total debt. In blue, the top10 in debt per inhabitant. In yellow, the top10 in debt per inhabitant, with more than 20,000 inhabitants.

Council debt's map. In red, the top10 in total debt. In blue, the top10 in debt per inhabitant. In yellow, the top10 in debt per inhabitant, with more than 20,000 inhabitants.

On this map, yellow spots have been also placed in councils with the largest debt per inhabitant (> €1,149) and at least 20,000 inhabitants. The pattern is also intriguing, and it is reassuring to know that places such as Benalmádena, Pájara, Calvià or Sitges are in cities’ top of the Spanish council debt: for sure they have invested in services, and for sure the building and the touristic crises are not undermining their abilities to pay the money back.

Let’s see what is happening at the Northwestern corner. Galician councils have a moderate debt if compared with Spanish ones. Corunna, the city with a larger debt, is far from the Spanish top both in absolute figures and in relative ones.

Top10 of Galician council debt (2008)

Top10 of Galician council debt (2008)

Only eight Galician local authorities (out of 315) have debts per inhabitant larger than the Spanish average (€566). When the top10 is established still some surprises arise. The small, montainous and almost isolated Vilariño de Conso is leading. Why?

Top10 of Galician council debt per inhabitant (2008)

Top10 of Galician council debt per inhabitant (2008)

This map can give some clues. To the council figures, the debt from Deputacións, a supra-local authority providing services to small and no that small councils, have been added. The deputacións’ debt is also moderate in the whole of Spain, are Lugo Deputación is the second best in having a small level of debt, with ‘only’ 7 million euros. The Ourense Deputación has the highest level of debt out of four deputacións in Galicia in relative terms, and Corunna’s one the largest debt in absolute numbers (M€ 98). Citizens from ‘black’ councils suffer the highest level of debt, due to this addition.

Council Debt map. Black (>€1,000), brown (€500 - €1,000), red (€400-499), dark orange (€300-399), light orange (€200-299), pale yellow (€100-199), white (<€100)

Council Debt map per inhabitant. Black (>€1,000), brown (€500 - €1,000), red (€400-499), dark orange (€300-399), light orange (€200-299), pale yellow (€100-199), white (<€100). Thanks to oom!

The darkest areas depicted seem to follow two different patterns. On one hand, coastal territories, where the building pressure was really important over the last years, are in the top. No good news for these councils in the years to come. On the other hand, most part of the largest debtors are located in the poorest areas of Galicia, where councils have no resources, but also where councils offer few services or none at all. It is possible to consider that these councils are doing their best to provide at least some services, and that they have to incur in large debts in order to achieve it. But a worse option of just throwing the money out is still available, particularly if there is a lack of control in the expenditure’s efficiency.

Regardless the true reason or reasons laying under this map, it is depicting an unsustainable model of funding or a failed system to audit the council expenditure. Or both. Some actions have to be taken by councils, Galician government and Spanish government. And this is the best moment for doing it: time of crisis, time of opportunities. For a bad management in a council damages its citizens and voters, but council bankruptcy damages everybody.