Global economy: Debt markets go local

Local government is struggling under the weight of debt in parts of the eurozone and the US

Think global, act local: so goes the old environmental maxim.

But if you're looking for the latest problem hitting the global economy, you'd best think local too.

The epic saga that is the eurozone crisis is now having to deal with the problems of Spanish local government. And what problems they are.

Last Friday, Valencia formally lodged a claim for help from the Madrid central government.

The vast (and relatively prosperous) Catalonia is tipped to follow before long. Indeed, there could be as many as eight out of 17 regional governments going to the central government because they can't service their debts.

Those regional administrations need to roll over more than £12bn (nearly 16bn euros) of debt by the end of the year. And that's while they look at the market rate for Spain's sovereign debt rising even higher on Tuesday morning, climbing above an unsustainable 7.5%.

Roll over, Rodrigo

According to the Financial Times, Catalonia has total debt of nearly 42bn euros (£33bn), an eighth of which has to be re-financed by the end of this year.

Valencia has debts of nearly 21bn euros (£16bn), and needs to raise more than £2bn of that this year.

It represents a different type of pressure on prime minister Mariona Rajoy, as he seeks to play the regional politics of Spain.

Catalonia wants more taxation powers, and the right to send less of what it raises to Madrid - just as the Basque government already does, while keeping its books in relatively good condition.

The ruling party is no great enthusiast for devolution to the regions, so the crisis gives it an opportunity centralise tax-raising and borrowing powers.

External market pressures dictate that it should, but there are regional pressures pushing in the opposite direction.

El Devo Maximo

Does this sound familiar to those immersed in the debate about Scotland's constitutional future?

Scotland doesn't have its own debt problem. One obvious explanation is that it hasn't had the powers and the opportunity to build one up. Not yet, anyway.

But if the markets continue to bear down on democratic politics, as they've been doing through the eurozone crisis, the lessons won't be missed at the Treasury in London when (or if) it faces up to the devo max/plus campaigns aimed at further loosening the purse strings in Holyrood's favour.

Spain's problems are a reminder that fiscal autonomy comes at a price, currently one of instability.

The Treasury's notoriously tight control on UK purse strings and borrowing - with the most centralised European tax system other than Malta's - are made to look rather attractive, at least in Whitehall.

Bankruptcy protection

Neither Spain nor the eurozone, by the way, are unique in having local government finance problems. A handful of Californian municipalities have filed in recent weeks for bankruptcy protection.

They include Stockton near San Francisco - the epicentre of the sub-prime earthquake. Further east Scranton, Pennsylvania, responded to its own crisis by slashing city workers' pay to minimum wage levels.

A report earlier this month by former Fed chairman Paul Volcker pointed to US state budgets become unsustainable, particularly as Republican pressure in Washington bears down on the welfare, education and support programmes that the states tend to administrate.

And the slowdown in China also highlights pressure from its local government. Those administrations are hardly autonomous, but many have financed the boom years by selling off a lot of land.

With prices in retreat, that source of funding is putting a lot of local budgets in trouble.