By Blanca Rodríguez Piedra and Catherine MacDonald
PELEAS DE ABAJO, Spain (Reuters) - Fifty years ago Peleas de Abajo was a centre of farming innovation. Now it is famous for claiming to be Spain's most indebted municipality after investments made during the country's boom years went sour.
The small town in the northwestern region of Castilla y Leon is struggling to pay its bills and service a pile of debt that accumulated from an investment in a rest home 15 years ago when cheap loans were plentiful.
The riches to rags story is typical of towns and regions across the country. After years of overspending their finances are under scrutiny as Spain tries to rein in its budget deficit just as the economy heads towards recession.
Every euro is being scrutinized in an austerity drive to chop Spain's deficit to the European Union limit of 3 percent of gross domestic product next year from 8.5 percent in 2011. Town halls alone generated a deficit of 0.4 percent of GDP last year.
The 250 residents of Peleas de Abajo are embarrassed about the 4.6 million debt which equals about 20,000 euros per person, nearly 10 times the level to each inhabitant of Madrid.
"It's disgraceful, it's incredible a small town owes more (per person) than a big city," said Jose Ramon Guerras, 30, who runs the town's only bar, where a handful of men gather at lunch time to play cards.
Outside the bar, the streets are quiet. The only activity in the square is when a handful of women in their dressing gowns came out of their homes to meet the bread van.
It wasn't always this way.
Former dictator Francisco Franco's agriculture secretary came from Peleas de Abajo and in the 1960s he chose his home for a pilot farming project, grouping together small parcels of land to enable the purchase of large machinery.
"They started buying tractors ... and cultivating beets. All the surrounding towns came here to farm the beet. When anyone would talk about going to Germany or France to work, the people would say 'but we have Germany right here'," said Mayor Felix Roncero.
Private farms in the town are still healthy but the public administration is saddled with debts, mainly from the 300,000 euro loan taken out to build the Virgen del Carmen nursing home.
Like many other towns and cities in Spain, Peleas de Abajo suddenly found it difficult to continue meeting payments after a national property bubble burst in 2008, unemployment soared, public sector subsidies were cut back and tax revenues fell.
"No one has a bigger debt than us, we're ahead by a wide margin," said Roncero, who said the town has sold off land to try to keep up with payments.
FIVE HUNDRED YEARS OF DEBT
At the rest home, most of the beds are empty and there are almost as many employees as residents.
"We haven't been paid for five months. Or paid only 50 percent one month, then another month, the debt mounts up," said Adoracion Roman, director of the home.
Roncero said the unpaid interest on the original loan to build the residence accounts for more than half of the town's debt.
Another 600,000 euros is owed to Social Security for unpaid tax on workers, with further hundreds of thousands in arrears for heating the building and paying providers of food and other services.
Peleas de Abajo is not alone. Overspending and mismanagement in more buoyant times have left many administrations struggling to pay their bills, in turn hurting local businesses that are vital to keeping an economy going.
The central government announced a 35 billion euro loan program for heavily indebted municipalities and regional governments last month to pay suppliers and help them get their finances back on track.
Others are taking more unusual steps. One small town in northeastern Spain is trying to rent its land for marijuana cultivation to pay off their 1.3 million euros debt in two years.
Roncero is trying to renegotiate with creditors, otherwise he says it will take 500 years to repay all his town's debt.
He is also hoping to transfer the management of the old people's residence to a private company and then use the rent to pay down about 10 to 15 percent of the debt over 20 years.
Emilio Rivera, a 60-year-old who has lived in the town his entire life, is not optimistic.
"This is a farming and ranching town and since we were all busy with our work we didn't worry about the bad management that was going on. One, two, three, ten years of bad management, you can't resolve that in a day, impossible because it's a huge debt," he said.
($1 = 0.7622 euros)
(Writing By Sonya Dowsett and Tracy Rucinski; editing by Fiona Ortiz and Anna Willard)