Sober Look: Spain's regional rescue fund is quickly put to use

Spain's regional rescue fund is quickly put to use

Posted: 28 Aug 2012 08:41 AM PDT

As expected, more of Spain's regions are asking for a bailout. The program to help the regions was set up in July (see discussion) to create Spain's internal version of the "Stability Bond". With the regional fiscal problems escalating (see this discussion from March), the urgency of the situation could not be overstated.

Boston Globe: - Spain’s northeastern region of Catalonia, a hub of industry and business, said Tuesday it will seek €5.02 billion ($6.29 billion) in aid from the central government, adding to the country’s financial troubles as it struggles to avoid needing a sovereign bailout.

Catalonia, which has Barcelona as its capital, became the third region after Valencia and Murcia to officially solicit aid. Valencia said it will seek €3.5 billion and Murcia is to ask for up to €300 million.

Many of the 17 semi-autonomous regions are struggling with the recession, the country’s second in three years, following a real estate crash in 2008 that has pushed the unemployment rate to near 25 percent.

Because the regions are unable to borrow on financial markets to repay their huge debts, they are being forced to impose severe cutbacks. When that is not enough, they must ask the central government for help.

Because this action was anticipated, Spanish debt did not move materially - the current 10y is down half a point (on price). But this event clearly demonstrates that Spain's funding needs are greater than originally thought (see discussion). And as today's GDP number shows, Spain's recession is continuing to deepen, worsening the fiscal conditions of the regions.

Spain's GDP (Bloomberg)