Days of wine and roses

July, 2007. Valencia is one big party. At the Veles e Vents building, built to house the headquarters of the America's Cup, a reception committee made up of the city's mayor, Rita Barberá, along with the then-head of the regional government, Francisco Camps, greets Ernesto Bertarelli, the winning captain of the venerable yachting competition. It's a time of wine and roses for Valencia: the city has just hosted a major global sporting event thanks to two politicians at the peak of their careers, envied by their rivals and revered by their Popular Party (PP) colleagues.

The following year, in the run-up to the general elections, party leader Mariano Rajoy highlighted the Valencia regional government as an example of efficient administration. "This is the model that I would like to apply to the government of Spain." As recently as a year ago, when the corruption scandal that eventually brought down Camps was already headline news, the PP's candidate to head the regional government of Andalusia, Javier Arenas, said: "Governing isn't about spending more, but about spending wisely. Governing is doing what Camps has done."

Four years on from that America's Cup moment, Camps is no longer the regional premier, and instead is on trial on corruption charges. Suddenly, nobody wants to talk about Camps in the PP. Valencia, once the envy of the country, is now seen as a basket case, up to its neck in debt, unable to meet its financial commitments, impoverished and mired in an institutional, financial and economic crisis. "If we were a savings bank, the Bank of Spain would have taken us over," says one senior PP official in the regional government. "Fortunately, we're not," he adds.

The region's empty coffers are not its only problem. It's hard to keep up with its corruption scandals: in Castellón, an airport that should never have been built; in Valencia, the Emarsa sewage-treatment affair; in Alicante, the Brugal case, centered on illegal rezoning; and hovering over the entire region, the Gürtel kickbacks-for-contracts affair, in relation to which Camps is being judged. And more corruption is being uncovered every day. As one local businessman comments: "This is the absolute pits; our image has been ruined."

The region has become politically untouchable: Rajoy has not included a single politician from the region in his national government. A veteran PP member says that the prime minister has effectively set up a cordon sanitaire around his government "in the hope of protecting himself from any time bombs that have not yet been detected but that could go off in the future."

The Gürtel network of bogus service contracts was fed with taxpayers' funds, but it wasn't the only method used to make money by business people with the right political connections. Take the Terra Mítica case, for example, the theme park dreamed up by former regional boss Eduardo Zaplana in Benidorm and financed by regional savings banks Bancaja and the Caja de Ahorros del Mediterráneo (CAM), which has since been nationalized.

The 377-million-euro theme park has been a resounding commercial failure. It has been given to the Aqualandia water park chain, which is now responsible for its 65-million-euro debt. The regional government expropriated some 10 million square meters of land to build the park, building a five-star hotel in the process, along with five two-star hotels and two golf courses. The project was a failure from the start, and it soon went bankrupt. In a bid to raise cash, more than 200,000 square meters were sold off to property speculator Enrique Ortiz- now facing charges in both the Gürtel and Brugal cases. But by the time he started building, the property market was in free fall.

Other, similarly ambitious projects financed with public money ended up like Terra Mítica. They were sold to the public as ways to create jobs and stimulate the local economy, but in reality were little more than property scams. The Ciudad de la Luz film studios in Alicante, another fiasco which cost 300 million euros and has left a debt of 190 million euros, was used as a means to speculate on land. Some 700,000 square meters of real estate close by were bought by Bancaja and Enrique Ortiz, along with a further 200,000 square meters. These purchases are now being investigated by the police.

The new airport built at Castellón is much more than a place for airplanes to take off and land. It is a symbol of the megalomania of Carlos Fabra, who ruled the province as his personal fiefdom. From the start it was a vast opportunity for speculation, with the airport at the center of a rezoning operation that would allow for the construction of property that would in turn finance any likely operating losses. The Camps administration was ever-vigilant when it came to protecting the interests of the region's business community. The company that was awarded the concession to build a tram out to the airport was guaranteed a 10-percent profit on the investment, regardless of whether any passengers ended up using it. The current regional administration headed by Alberto Fabra (no relation) has canceled the contract with the company that was to run the airport, and withdrawn the license to run the tramline, considering them prejudicial to the local government's interests.

The looting of the regional government's coffers became institutionalized over the last two decades, with leading local business figures and politicians in collusion, as exemplified by the Emarsa case.

Emarsa (Entidad Metropolitana de Aguas Residuales Sociedad Anónima), was created by Valencia City Hall with 17 other local municipalities in order to purify waste water before it is released to the sea, or used to water the L'Albufera Nature Park. It ran the Pinedo Sewage Plant, the largest in the Valencia region, and one of the largest in Spain, and it was financed by a water charge imposed on all residents in the Metropolitan area of the regional capital.

In July last year the PP, which has controlled Emarsa since the 1990s, decided to liquidate the company as it was bankrupt, and the process revealed a black hole of 17 million euros.

A judicial investigation is now underway, investigating the period 2004-2010. It has already seen 16 people indicted for misuse of public funds, continued fraud and other crimes. Total fraud is estimated to be over 30 million, but what is making the headlines is how the directors enjoyed a whole list of extravagances at the cost of the taxpayer.

It has been shown that the directors used company money to buy jewelry, clothes, electronic items, car accessories and even 1,000 euros in lottery tickets each. They rented vehicles and used them to visit health spas. There were family trips to Paris, New York, Johannesburg and other destinations, always staying in four- and five-star hotels. Often the hotel stays were with female "Romanian translators." Directors were able to spend 92,443 euros in a year on restaurants, often eateries listed in the Michelin guide.

False claims for equipment were made with fake bills. One person claimed 188,000 euros over six months for computer equipment, listed as 164 keyboards, 149 mice, 155 power supplies, 141 anti-virus licenses and 79 monitors.

Nine of Emarsa's employees were paid more than the Spanish prime minister and the company was full of people from the second and third levels of the PP and the Unió Valenciana party.

Some employees only went to work to get paid- a practice admitted to in court by the ex-manager, Esteban Cuesta- and over the 2004-2010 period the Generalitat regional government tripled the funding for Emarsa, taking it to 18.4 million euros in 2009, despite the fact that the amount of water purified only increased by 6.5 percent.

Cuesta himself, who was appointed by Valencia Mayor Rita Barberá, became a village mayor and remained a manager of the local PP in Valencia until the party suspended him last November. He made cash deposits into his bank of 251,000 euros between 2005 and 2009.

Valencia has become a symbol of what can go wrong when self-interested politicians and business people get together to spend public money, and when there is no public supervision or accountability. As late as November 2009, with Spain's economy in crisis, and with the country's highest rate of regional debt, Valencia's administration spent 52,800 euros on lavish preparations for the Ferrari World Finals at the Cheste motor circuit. Camps and Barberá took advantage of the event for a photo opportunity, cruising round the track in a Ferrari, accompanied by Formula 1 champion Fernando Alonso. It was another example of the PP's strategy of trying to put Valencia on the map by hosting major sporting events, including the European Grand Prix.

In 2007, with the first signs of the crisis already on the horizon, Camps struck a deal with Formula 1 boss Bernie Ecclestone. The event would be held in Valencia if Camps won the elections the following year. But neither was aware of the huge costs of hosting such a race. The regional government lied when it said that the Grand Prix would not cost the taxpayer; it ended up paying out 80 million euros. The contract to host seven Grands Prix in the coming years will cost more than 244 million euros of public money.

The new administration has tried to cancel the contracts, but it turns out that the cost of doing so would be almost as expensive as hosting the race. It is now talking to the Catalan regional government about taking turns to share the event.

It should be remembered that Camps remained popular with voters even while he faced trial over bribery charges. He was re-elected with an increased majority in last May's regional elections. By the end of the year, Camps was facing charges for allegedly receiving tailor-made suits in return for granting public contracts, with further possible financial irregularities still under investigation. Nine other PP candidates were elected while also under investigation for involvement in the case.

Like Silvio Berlusconi, the former Italian prime minister who seemed scandal-proof for years, Camps portrayed himself as the victim of a witch hunt by political opponents, judges and left-leaning media. Asked in December 2010 to comment on some of the allegations, he said that "nobody should believe Soviet-style propaganda against everything that has been achieved in Valencia."

But eventually the weight of accusations against Camps made him a political liability to his own party, and he resigned. He was replaced by Alberto Fabra, the former mayor of Alicante, who was unable to blame the region's disastrous finances on anybody else but his predecessor. "We knew things were bad, but we had no idea that they were this bad," says a senior Valencia official.

So how did things get this bad?

Successive administrations, but particularly that of Camps, based economic growth on construction, tourism and hosting large-scale international events. To do this they relied on the region's savings banks. Bancaja and CAM financed Terra Mítica, the new Formula 1 track in Valencia and Castellón's airport. When the construction bubble burst, they were ruined, while the regional government owed millions.

In the process, the regions' financial system collapsed, in turn cutting off credit to businesses. The region is now unable to look for money on the international markets. Ratings agencies Moody's and Fitch dismissed an attempt to appeal to the electorate to buy 1.8 billion euros' worth of bonds as "junk."

Valencia's regional government now faces a 62-billion-euro debt, with no means to raise money other than by tax hikes. Savage spending cuts are expected in the coming years and have already hit education and healthcare hard.

At the end of last year, the central government had to bail out Valencia to help it pay a loan back to Deutsche Bank. In return, Rajoy told Fabra that he would have to implement major cuts. But the problem is not simply about reducing spending; it's about finding the money to pay suppliers. More than 450 schools face closure because they have no funding.

Fabra will have his work cut out. He has already met with hostility from most in the region's parliament. Observers say that Rajoy's refusal to have anything to do with Valencia is not helping: if Fabra is to press ahead with the cuts demanded by the PP, he will need support from Madrid, they say. The party is most certainly over.