1. Spain should maintain positive macro & fiscal momentum in 2025-2026
Spain should maintain its positive and differential macro and fiscal dynamics vs. the EU average in 2025/26,
which will further drive investor appetite for Iberian risk in 2025: the 4Q24 provisional GDP growth figure once
again surprised to the upside, with a figure of 0.8% QoQ, despite the negative impact from the DANA (severe
weather effect) in Valencia, which would lift Spain’s 2024 GDP to 3.2% YoY.
According to our BBVA Research colleagues, Spanish GDP growth in 2025-2026, at 2.3% and 1.7%
respectively, would continue to outperform the EMU average in the same periods. Domestic demand will
be supported by falling inflation, rising wages, the improvement in employment, and reduction in interest
rates. The negative impact of the potential US Trade Policy changes on Spanish GDP growth would also be
below the estimated average impact in the EU, at 0.2pp in our base-case scenario in 2025 and around 0.7pp in
2026 vs. an accumulated reduction of more than 1.5 points in the EU in the 2025-2026 period in the event of a
10% tariff hike on US imports from the EU.
The Spanish debt-to-GDP ratio stood at 104.4% in 3Q24, a reduction of seven-tenths of a percent
compared to the end of 2023, a reduction of 3pp of GDP in the last 12 months, and an increase of
6.8pp compared to the pre-pandemic level. The recent revision of GDP has reduced the debt ratio by
almost three percentage points. The accumulation of debt levels in the past twenty years has been driven by
the financial crisis of 2008, when it ballooned from a debt-to-GDP ratio of 35.8% in 2007 to 105.1% in 2014 (an
increase of 69.3pp) and the pandemic in 2020, when it rose from a starting point of a 98.2% debt/GDP ratio to
a peak of 124.2% by 1Q21, which had fallen by 19.8 points as of 3Q24.
AIReF's initial medium-term projection estimates a reduction in the debt ratio of 7.2pp of GDP
compared to the 2023 level, placing it at 98% in 2029. The reduction in the ratio will be supported by
nominal GDP growth (25.4pp), with the deflator making a very significant contribution (13.6pp). The public
deficit contributes 16.8pp to the increase in debt, of which 15.9pp is interest.
AIReF forecasts a general government deficit of 3% of GDP in 2024, which it expects to improve by
three-tenths of a percentage point in 2025 before beginning a slight upward path in 2028 to end at 2.9% in
2029. The reduction of the deficit in 2023 and 2025 is mainly based on the lower cost of the lingering fiscal
measures from the energy crisis and a favourable macroeconomic scenario, partially offset by the revaluation
of pensions and the increase in non-recurring transactions.
2. Spanish regions: deficits stabilising in an area of around the 0.5% of GDP, debt ratios will continue to
improve in 2025-2026
Up to October’24, the latest available figures, the regional treasuries’ non-financial balance was in surplus
(EUR6,176mn). This figure is equivalent to 0.39% of GDP, in contrast to the deficit recorded in the same period
of the previous year (0.25% of GDP) driven by the increase in State transfers in 2024 vs. 2023 due to the
positive tax collection dynamics and the sizeable 2022 settlement.
On average, Spanish regions are expected to post a 0.3% budget deficit (ex-DANA), a 0.6%
improvement vs. 2023. In 2024, all regional governments will fail to comply with the spending rule, although
only six will end up with a deficit.
AIReF estimates that by 2025 the Autonomous Communities will reach a deficit of 0.5% of GDP vs.
the 0.1% of GDP target, with a computable expenditure higher than the rate of 3.2% set for the national
expenditure rule. As such, the balance of the subsector would deteriorate by two-tenths of a percent
compared to that expected in 2024, due to the moderate variation in regional revenues, close to 2%, and
estimates that expenditure as a whole will increase by more than 3%.
The regional debt-to-current revenue ratio is expected to decrease in 2024 and 2025 in all
Autonomous Communities. In the subsector as a whole, the ratio is expected to fall by more than 10pp, from
154% in 2023 to 142% in 2024.
Regional debt-to-GDP ratios to fall further in 2025-29. AIReF estimates that the Autonomous
Communities will reduce their level of indebtedness by more than one point from 2023 (21.7%) to reach
20.4% of GDP in 2025. From the 2023 level, the ratio is due to improve in 2024 and 2025 on expected GDP
growth, partly offset by the deficits forecast for the subsector as a whole. By instruments, the largest creditor
is the Financing Fund of the Autonomous Communities, with 60% of total debt, followed by loans with national
financial institutions (18%) and bonds (14%).
The heterogeneity that characterises the Spanish regional debt ratios keeps widening, pending any
final decision regarding the proposed debt-relief measures. The difference between the most indebted
community (Valencian Community, 42.2 points of GDP) and the least (Canary Islands, 12.2 points) is 30
points.
The main reasons for concern are a) the high stock of debt that most of the autonomous regions have
accumulated; and b) the fact that the improvement in the regional budget balance recorded in the last
years of this period is partly based on anomalous and difficult to sustain factors, including unusually
low investment and heavy interest subsidies through the FLA and other state liquidity mechanisms.
3. Key pending gamechangers in the Spanish regional space
a. Debt-relief for the common-law Autonomous Communities: On 2 November 2023, the PSOE political partyreached a central government legislature agreement with the Catalan left-wing party of ERC, in which, among service transfers to the region and bilateral workflows agreed to be set up, the central government agreed to take on EUR15bn of the region’s FLA debt. The agreement also opens the door for other regionalgovernments to seek agreements with the central administration for their own debt assumptions. The stated objective of the debt assumptions would be: 1) to ease the regional financial situation; and 2) facilitate the return to financing in the debt markets.
A new Fiscal & Financial Policy Council (CPFF meeting) will be held in February 26th, where it is likely that more light will be shed on the debt relief process, both in terms of timing and process, and also how the regions with no or limited outstanding State loans will be compensated. The potential implementation of asymmetric deficit targets, a long-standing request from numerous Spanish regions, could also be discussed.
We reiterate our view that a limited debt-relief exercise would not be enough to bring the regions with the most leveraged metrics back to market discipline and that this exercise should advance parallel with a new regional financing system, which so far has already accumulated a delay of 10 years and where any progress looks unlikely, as eleven out of the seventeen regions in Spain are held by the Conservatives, the main opposition party.
b. A singular financing model for Catalonia, whereby all taxes are collected in the region and then there is a negotiation over what is contributed to the common fund of the Autonomous Communities as interterritorial compensation (territorial rebalancing fund) and the contribution (quota) to the state for the services provided in Catalonia such as foreign action, defence and justice, among others.
c. The update of the regional financing system: 10 years in the making and still counting... this main reason for this delay is the continuation of the extraordinary liquidity mechanisms from the State for a much longer period of time than was originally envisaged and desired, thus further widening the gap between the regions with the strongest and weakest credit metrics. There is a significant correlation between access to market and fiscal discipline.
4. Spanish regions: diversity of Financing Strategies
Since the implementation of the extraordinary liquidity mechanisms (FLA and FFF) in 2012, government
loans quickly became the main funding source for Spanish regions. However, they started to lose weight
vs. private loans and bond issuances in 2019, as more regions began to access private funding sources
(Asturias, Castile-Leon, Andalusia and, intermittently, the Balearic Islands). The Regional Liquidity Fund (FLA)
currently accounts for almost 59% of regional debt. However, the distribution between regions is extremely
uneven and, therefore, the possible forgiveness of a part of the debt held by Autonomous Communities
represents a complex situation still to be addressed, mainly due to the diversity in the debt portfolio
management strategies.
We estimate the overall funding needs of Spanish regions in 2025 at around EUR39bn, flat YoY vs.
2024. Seven regions will seek full access to capital markets (Asturias, the Canary Islands, Castile-Leon,
Galicia, Madrid, Navarre and the Basque Country) and an additional one (Andalusia) will mix both capital
markets (80%) and State funding (20%). The remaining regions will remain fully funded through the
extraordinary liquidity mechanisms in 2025.
The positive momentum and investor appetite for Spanish risk should bode well for more access of
Spanish SSAs to capital markets. Despite the fact that the fiscal performance in 2024 improved vs. 2019,
the last year with binding fiscal targets, this could still imply that more Spanish regions decide to test the
financial markets waters in 2026, the expected deviation of all the Spanish regions from the spending rule in
2024 will call for some flexibility from the Finance Ministry, so more regions could adhere to the mixed
financing scheme that Andalusia has successfully done since 2019.
5. Spanish SSAs: Primary & Secondary market
In 2023 we saw eight regions and public sector agencies accessing credit markets, through 12 public bond
issuances (seven during the same period in 2022), for a total volume of EUR7.5bn (EUR4bn in 2022). In 2024
the bond issuance volume increased to EUR9.2bn, c.EUR8bn coming from public benchmark deals and
EUR1.2bn from private placements, where ICO, a number of regions such as Andalusia, Madrid, Navarre and
the Canary Islands were active.
EUR4.3bn of bonds issued in 2024 by ICO and ADIF-AV in different formats and tenors, so the overall
regional sector bond issuance was slightly below EUR5bn, roughly stable vs. 2023 figures. Regarding
2025, we expect ceteris paribus a similar activity in bond format, as regions will refinance their 2023 State loans with banks loans, although any final decision regarding the timing and implementation of the debt-
relief measures could significantly impact the bond issuance activity of Spanish regions in 2H25.
The volume of bond issuance by Spanish regions (around EUR5bn out of total funding needs of
c.EUR40bn) dwarves both in absolute and relative terms the recent activity we see from other federal
States and their regional players, such as the German Länder (EUR50bn of bond issuance in 2024 out of total
funding needs of EUR80-90bn) and even the volumes of smaller countries such as Belgium, where the
regional absolute bond issuance is twice the level we see from Spanish regions, despite the former country’s
population being a quarter of the latter’s.
Beyond the regional sphere, ICO and ADIF-AV are still recurrent issuers as FADE issuance activity has
already ended unless a new tariff deficit is originated and transferred to the Fund. 2024 saw one comeback to
the credit markets, the City of Madrid (METMAD), but unlike 2023 there no new issuers in the space (AENA
made its inaugural deal in 2023, a 7Y EUR500mn bond issued at SPGB+49bp level). CORES has been a
sporadic issuer since the outset.
European SSAs ASW spreads under pressure, at multi-year wides: The combination of a) the collapse of
the Bund-swap spread in 2H24; b) the elevated (and uncertain) supply levels from key reference names such
as the EU; c) the negative news flow about France’s political and fiscal situation since 2H24; and d) the
increased appetite from fixed-income investors for credit instruments vs. rates-sensitive asset classes have
driven the ASW spreads of the European SSA segment to multi-year wides.
6. Market conditions should be very supportive for Iberian SSA risk in 2025
Access from Spanish SSAs to the markets in 2023 and 2024 was largely unchanged vs. SPGB (+15-30bp
within regions, with ADIF-AV the widest name at or above the 40bp mark due to the regulatory treatment).
Conversely, the offered pick-up vs. Spain has attracted a large number of investors. particularly for the
more liquid Madrid and Basque bonds, which were more than 4x oversubscribed. We have also seen an
improvement for smaller issuers (Andalusia and Galicia). We expect Spanish SSAs to be well received in
the primary markets in 2025, driven by the success in terms of attracting foreign investors, as the Spanish
macro/fiscal/political backdrop still compares favourably with the larger peers in the EZ.
In fact, and due to the appetite for Spanish risk on the limited supply within the covered bonds &
SSAs segment, the ADIF-AV dual tranche issued in January’25 reached unprecedented oversubscription
levels (5.2x in the 10Y tenor @ SPGB+45bp and 7.5x in the 5Y one @ SPGB+43bp) vs. the 2.3x
oversubscription levels in the dual 5Y-10Y tranche issued in January’24 at even slightly wider levels @ SPGB
(+48bp and +46bp respectively).
Spanish SSA spreads vs. SPGBs, largely 10-40bp of their national benchmark, are in line with the
German Länder pickup vs. Bunds, in the 15-35bp area, as well as at the of level of French agencies at
c.OAT+15-35bp, such as the City of Paris (LCR 1/0% RW) 15Y bond sub-benchmark bond issued in
January’25 @ OAT+16bp. Belgian regions, a direct comparable to the Spanish ones, trade at OLO+20/30bp
for top-quality names such as FLEMSH, while WALLO and the other less frequent issuers trade in the OLO+35-
50bp range. However, Italy’s CDP trading at the BTPS>30bp level suggests that benign regulatory treatment
(similar to SPGBs under CRR), which is not replicated to this extent in other European countries, also
underpins this stronger performance, a point of particular note given that banks are their main investors,
making up a large portion of primary demand.
There is a wide range of regulatory treatment among the French SSAs in terms of LCR and RW. Issuers
such as AGFRNC (NA/20%), ALSFR (NA/20%), IDFMOB (2A/20%), REFER (2A/20%), SAGESS (2A/20%),
SNCF (2B/50%) and SOGRPR (2A/20%) trade at the wider end of the spread range. By the same token,
Italian and Portuguese SSAs (CDEP (NA/50%), AMCOSP (NA/100%), FERROV (2B, 100%) and COMILA
(2A, 20%) face worse regulatory treatment than the Spanish. Belgian and German sub-sovereigns,
which are all LCR 1, RW 0%.
This regulatory advantage also gives a slight edge to the Spanish regions over Spanish cédulas, but
due to the ratings differential and better perception of financial risk vs. public sector risk in the current market
environment. Spanish sub-sovereigns now trade 20bp wider vs. covered bonds, in the same range as the
French SSAs vs. covered, while the gap is even wider in the Belgian case, with the sub-sovereigns trading
c.50bp wider than the covered bonds. For tenors beyond the 7Y area, the lack of supply activity in long-tenor
covered bonds since 2H24 and the flatter curves of EGBs and SSAs imply that banks’ ALMs in particular
prefer to play SSAs vs. covered bonds in the longer tenors given their better liquidity and regulatory
treatment.