Catalonia will tap a national rescue fund after Spain’s most indebted region was shut out of financial markets, suffering the type of funding squeeze that led Greece, Ireland and Portugal to seek international bailouts.
Catalonia, the largest of Spain’s 17 autonomous regions, will seek 5 billion euros ($6.3 billion), almost a third of the 18 billion-euro fund created in July by the government of Prime Minister Mariano Rajoy. Valencia was the first to tap the fund with a request on July 20.
Spain’s ability to avoid a broader bailout depends on the government getting the regions to reduce their shortfalls, which were one of the reasons the country missed its budget-deficit target in 2011. The regions, which control more than a third of public spending, are increasingly being shunned by investors, mirroring the dynamic of the euro-region debt crisis.
“This is a milestone because it’s a formal recognition that Catalonia doesn’t have the money it needs,” said Javier Diaz-Gimenez, an economics professor at IESE business school in Madrid. “It shows how weak Spain’s arrangement has become for its regional finances.”
Data today showed Spain’s recession deepened in the second quarter, with the economy shrinking 0.4 percent from the previous three months. Consumer spending fell 1 percent and government spending declined 0.7 percent.
Spain’s 10-year borrowing costs reached a euro-era record of 7.75 percent on July 25. The yield has since come down to 6.47 percent on expectations that the European Central Bank may start buying the country’s debt. Spain still pays 513 basis points more to borrow for 10 years than Germany.
While Rajoy has introduced the most aggressive austerity measures in Spain in more than 30 years, the government risks missing its 2012 fiscal targets without the regions curtailing their shortfalls.
A report this month by the Fedea research institute in Madrid said that the regions won’t keep their budget promises for this year. It forecast deficits in the regions may reach 4 percent of GDP, compared with 3.3 percent last year and a target of 1.5 percent.
Rajoy’s eight month-old government has bailed the regions out several times this year to prevent any default, transferring funds to them and organizing as much as 41 billion euros in bank loans to allow them to pay suppliers and redeem bonds.
“Catalonia can’t face the redemptions it has at the moment, it is the big problem in this country,” Rajoy said today. “Spain will help Catalonia as it has done before and we’ll discuss with them everything that needs to be discussed.”
The liquidity support for the regions has burdened state finances, and data last month showed that the central government’s deficit surged to 4.04 percent of GDP in the first half of 2012, exceeding its full-year target.
The regions started losing access to capital markets in 2010, prompting some to sell securities known as patriot bonds to their citizens. Andreu Mas-Colell, Catalonia’s finance chief, had called for state guarantees of bond issuance since August 2010.
Spanish Economy Minister Luis De Guindos said in March that the central government was considering backing the regions’ debt issuance. Four months later, the government created the 18 billion-euro bailout fund, with 6 billion euros coming from a loan from the state-owned lottery and the rest from the Treasury.
The 17 regions face redemptions of about 15 billion euros in the second half of this year, according to data from the Budget Ministry. They aim to run a combined budget deficit of 1.5 percent of GDP, or about 15 billion euros, a target Moody’s Investors Service says they will probably miss. The goal for next year, when the government forecasts the economy will still be shrinking, is 0.7 percent.