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Catalonia became the second Spanish region to tap a national rescue fund after the country’s most- indebted area was shut out of financial markets, suffering the same type of funding squeeze that led Greece, Ireland and Portugal to seek international bailouts.
Catalonia 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 to help shore up finances in the 17 autonomous regions. Valencia was the first to tap the fund with an unspecified request on July 20.
Spain’s ability to avoid a broader bailout depends on whether the government can get the regions to tame their shortfalls, which were the main reason the nation’s deficit was at 8.9 percent of gross domestic product in 2011, little changed from the previous year. 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.
“Catalonia can’t face the redemptions it has at the moment, it is the big problem in this country at the moment,” Rajoy said in Madrid today. “Spain will help Catalonia as it has done before and we’ll discuss with them everything that needs to be discussed.”
Concerns about the regions’ finances contributed to the surge in bond yields last month, with Spain’s 10-year rate reaching a euro-era record 7.75 percent on July 25. That yield has since come down to 6.46 percent on expectations that the European Central Bank may start buying the country’s debt. Spain still pays 512 basis points more to borrow for 10 years than Germany.
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.
Rajoy has introduced the most aggressive austerity measures in Spain in more than 30 years, though without the regions curtailing their shortfalls, the government is at risk of missing its 2012 deficit goal of 6.3 percent of GDP. Earlier this month, Rajoy imposed debt ceilings on the regions, with Catalonia limited to total borrowing of 22.8 percent of output this year, compared with 21 percent in the first quarter.
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.
The liquidity support 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.
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