Local government woes increase Spain bailout risk

PHILIPPE HUGUEN/AFP/GettyImages

(MoneyWatch) A request for financial aid by the regional government of Catalonia in Spain increases the chance that the country's national government will request a bailout of its own. Bond markets have so far ignored the impact of the plea for $6.27 billion and other troubling indicators as they wait to find out if the European Central Bank will act in coming weeks to shore up the Spanish government.

Catalonia, Spain's most indebted region, is the country's third regional government to ask for a bailout. The regions of Valencia and Murcia have already asked for funds from the $22.58 billion liquidity program the central government established to cover local administrations' debt maturities this year. Although only these three regional governments in Spain have to date asked for help, the country has six regions that can no longer afford to borrow money on international markets. The six regions have a combined debt of $181.9 billion, and $45.1 billion of that needs to be refinanced this year.

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Recent reports show that Spain's economy is in worse condition than previously thought. The eurozone's fourth-largest economy grew only 0.4 percent last year, compared with an earlier estimate of 0.7 percent, Spain's National Statistics Institute said this week. It also said the nation slipped into recession three months earlier than had previously been thought.

In addition, depositors continued to pull funds out of Spanish banks at a record rate last month, according to the ECB. Spanish bank deposits dropped 4.7 percent in July from the previous month, to $1.89 trillion. The roughly $94 billion decline comes in addition to at least $190 billion already withdrawn this year and was the sharpest monthly drop in Spain since the ECB started keeping such data in 1997.

Despite the tide of bad news, Spain's bond prices have held steady as investors await action by the ECB to stem the crisis. The Spanish 10-year bond closed Wednesday at 6.46, barely up from its level on Tuesday. Last month, ECB President Mario Draghi promised he would take all possible means to avoid the necessity of a bailout for Spain or Italy. He also said it would take several weeks to put these measures in place.

Draghi is expected to offer more details at a Sept. 6 press conference.