July 20 (Bloomberg) -- Spain said its recession will extend into next year as the region of Valencia prepared to seek a rescue from the central government and European finance ministers approved the bailout of Spanish banks.
Gross domestic product will fall 0.5 percent in 2013 instead of rising 0.2 percent as the government predicted April 27, Budget Minister Cristobal Montoro said after the Cabinet met today in Madrid. The government will spend 9.1 billion euros ($11 billion) more paying interest than in 2012, he said.
As the government set out the spending limit for next year’s budget amid a surge in borrowing costs, Valencia said it would tap an emergency-loan fund created last week. Regions face about 15 billion euros of debt redemptions in the second half, with Catalonia and Valencia the most indebted states.
“Like other regions, Valencia is suffering the consequences of liquidity restrictions in markets as a result of the economic crisis,” the regional administration said on its website.
Spain created the 18 billion-euro bailout mechanism to help cash-strapped regions even as its own access to financial markets narrows. The yield on Spain’s 10-year benchmark bond rose close to a euro era record today, at 7.284 percent, widening the gap with similar German maturities to a record of 613 basis points.
“I don’t want to send too soothing a message, everyone has to comply,” Montoro said even as he denied Valencia has called for an intervention. Montoro said the central government is reviewing regions’ budget plans after announcing last week that several aren’t on track to meet this year’s deficit target.
The slump came as euro-area finance chiefs signed off on a package of at least 100 billion euros to prevent the collapse of the country’s financial system.
“Spain will be expected to maintain its commitments to correct its excessive deficit in a sustainable manner by 2014 and to adopt the structural reforms set out,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in a statement.
The economy returned to recession last year and unemployment is surging after the collapse of the real-estate boom. The economic outlook is worsening as the government implements 110 billion euros of measures over three years to cut budgets, raise taxes, shrink public wages and charge more for education and health care.
Tens of thousands of Spaniards protested across the country late yesterday against the last austerity round, a 65 billion-euro package announced this week, the fourth since December. They called for a referendum on the measures they described as an attack on public workers, pensioners and the unemployed.
Unemployment will be 24.6 percent in 2012 instead of 24.3 percent, the government’s forecasts showed today, and 24.3 percent in 2013 instead of 24.2 percent. It revised the forecast for this year’s contraction to 1.5 percent from 1.7 percent. Exports will continue to drive the economy, rising 6 percent next year, as domestic demand continues to contract.
The spending limit for 2013 will be 126.8 billion euros, 9.2 percent higher than a year earlier, Montoro said. Stripping out the interest costs and contributions to the welfare system, the spending ceiling will fall 6.6 percent from 2012, he said.
The government also announced a plan to balance state-owned train operator RENFE’s budget by the end of the term, that involves separating rail services from infrastructure and selling stakes.
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