Spain's Catalonia asks Madrid for financial help

AP News
Posted: Aug 28, 2012 10:28 AM
Spain's Catalonia asks Madrid for financial help

MADRID (AP) — Spain's northeastern region of Catalonia, a hub of industry and business, said Tuesday it will seek €5.02 billion ($6.29 billion) in aid from the central government, adding to the country's financial troubles as it struggles to avoid needing a sovereign bailout.

Catalonia, which has Barcelona as its capital, became the third region after Valencia and Murcia to officially solicit aid. Valencia said it will seek €3.5 billion and Murcia is to ask for up to €300 million.

Many of the 17 semi-autonomous regions are struggling with the recession, the country's second in three years, following a real estate crash in 2008 that has pushed the unemployment rate to near 25 percent.

Because the regions are unable to borrow on financial markets to repay their huge debts, they are being forced to impose severe cutbacks. When that is not enough, they must ask the central government for help.

Spain's regions have a combined debt of €145 billion and some €36 billion must be refinanced this year. Catalonia owes more than €42 billion.

The government fund, which was set up on July 13 to help rescue the regions, has €18 billion in capital, part of it raided from the national lottery. If more is needed, Spain's central government will either have to issue debt at punishing rates or ask for a sovereign bailout from its fellow eurozone countries.

Prime Minister Mariano Rajoy and European Council President Herman van Rompuy both denied Tuesday that Spain was in talks for such a bailout.

"There are no negotiations," said Rajoy. However, neither of them denied the possibility that Spain will eventually need help.

Both politicians reiterated the need to move faster toward creating a European banking union that would be able to manage bank failures, lowering the financial risk to individual countries' public finances.

"Progress on banking unity is particularly urgent," said van Rompuy, who broke off from his holidays in Spain to meet Rajoy.

Van Rompuy said the EU was aware of the great efforts in reforms and austerity measures that Spain was making to fulfill its deficit curbing obligations and said its European partners were agreed on helping the country.

Rajoy is to meet French President Francois Hollande on Thursday and German Chancellor Angela Merkel on Sept. 6.

Spain has already been granted a loan of up to €100 billion by its 16 eurozone partners to help rescue its banks.

Because of the financial problems of the regions and banks, Spain's economy has never quite recovered from a property sector collapse in 2007 and new data released Tuesday showed its recession is deeper than previously thought.

Revised figures by the National Statistics Institute said the economy contracted by 1.3 percent in the 12 months through the second quarter, more than previous estimates of 1 percent.

The institute confirmed the second quarter's 0.4 percent drop from the previous three-month period. The government estimates the economy will contract 1.5 percent this year and 0.5 percent in 2013.

"The latest data for the second quarter show that the downturn in the Spanish economy is deeper than previously thought and accelerating," said from Robert O'Daly, senior economist for the Economist Intelligence Unit.

He said that data revisions suggest the Spanish and Italian economies are on similar paths as both countries suffer the effects of fiscal austerity and weaker external demand.

"Their deteriorating growth prospects will make fiscal consolidation efforts all the more challenging and possibly counterproductive," said O'Daly.

Spain and Italy are hoping that the European Central Bank will approve next week a proposal to intervene in bond markets to lower the borrowing costs of heavily indebted eurozone countries. By buying bonds, the ECB would push their yields down.

Expectation that such a plan will be approved in some form next week at the ECB's monthly policy meeting have already brought down borrowing rates for Spain and Italy.

The impact was evident in Spain's latest bond auction on Tuesday, when the Treasury sold nearly €4 billion in short-term debt auctions at much lower interest rates.

The Treasury sold €1.67 billion in three-month bills at an average interest rate of 0.95 percent, down from 2.43 percent in the last such auction July 24. It sold €1.93 billion in six-month bills on a yield of 2.03 percent, down from 3.69 percent.