Murcia follows Valencia in seeking bailout

Pressure builds up for Spain to request full rescue

Spain braced itself for a Black Monday in the markets after a second regional government said it will ask Madrid for millions of euros in rescue money.

The Mediterranean region of Murcia on Sunday said it will request between 200 million and 300 million euros from the central government to shore up its own finances. On Friday, Valencia became the first region to formally request assistance from the Regional Liquidity Fund (FLA) - a system created just over a week ago mirroring Europe’s national bailout fund - that allows regions to access financing under strict conditions.

“We hope it will be ready by September,” said Murcian premier Ramón Luis Valcárcel in an interview with the daily La Opinión. Valcárcel added that the conditions will be “very tough.”

“Nobody should think that we’re going to get the money for free.”

Valcárcel also added that, in practice, all 17 regions of Spain face similar intervention from the central government, since “if you don’t meet the deficit target, the state forces you to take measures, and that’s what intervention is all about.”

Valencia is Spain’s most indebted region, followed by Catalonia and Andalusia. Aware that international observers are wondering whether Madrid will be able to bring the largely autonomous regions in line with overall deficit targets, the state has mandated an 18-billion-euro reduction in regional expenditure this year. The regional deficit target is 1.5 percent of GDP, but Murcia’s deficit at the close of 2011 was 4.4 percent. Valencia’s is upward of 20 percent.

Paul De Grauwe, of the London School of Economics, forecasts a full bailout in the fall

The financial trouble at the local and regional level is also being felt by Social Security, which last May granted the public sector a payment reprieve worth 183.9 million euros, over 16 times higher than a May 2010 postponement.

Market reaction to Valencia’s announcement on Friday was merciless, with the Bolsa shedding 5.82 percent and the yield on the 10-year Spanish bond soaring to 7.274 percent after mid-afternoon, while the risk premium closed at 610 basis points over the benchmark German bund, considered by experts unsustainable for very long.

With more regions likely to request aid, it seems unlikely that either the 65 billion euro spending cut announced by Spain last week or the European go-ahead for a 100 billion euro bailout of Spanish banks will satisfy the markets.

In fact, a growing chorus of voices in Brussels is expecting a full-blown bailout for a country that will likely remain in recession until 2014.

“The market is mulling a second bailout, even a payment default, and it is already thinking how to make money with that. Investors have left and will not be coming back, at least for a while. Are we headed for a complete intervention? If things keep going this way, possibly yes. But Spain, if it drags down Italy, becomes a major problem: nobody in his right mind can avoid thinking about the dire consequences that would have,” said one high-ranking EU official on condition of anonymity, citing the European Central Bank (ECB) as the last great hope for Spain.

The government of Mariano Rajoy has been blaming the ECB for “not doing anything” to stop the speculators. Speaking at a summit of EU foreign ministers in Palma on Saturday, Spanish representative José Manuel García-Margallo lamented the fact that “some speculators in the markets” want to convey “a bad image of Spain in order to make money.”

These statements produced a swift response from ECB president Mario Draghi, who told Le Monde that his institution is “not there to solve the financial problems of states but to ensure price stability and to contribute to the stability of the financial system with total independence.”

Paul De Grauwe, of the London School of Economics, forecasts a full bailout in the fall, when the Spanish Treasury will need to refinance maturing debt worth 27 billion euros.

Recomendaciones EL PAÍS
Recomendaciones EL PAÍS