Indebted Valencia asks Spain government for help, markets jolted

Fri Jul 20, 2012 11:30am EDT
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By Julien Toyer and Nigel Davies

MADRID (Reuters) - Spain's heavily indebted eastern region of Valencia said on Friday it would need financial help from Madrid, spooking financial markets and complicating central government efforts to stave off a full-blown sovereign bailout.

On a tumultuous afternoon, the government also cut its economic forecast for 2013, indicating the country would stay mired in recession well into next year after a contraction expected at 1.5 percent in 2012.

Valencia, Spain's most indebted region alongside its northern neighbor Catalonia, sought help under an 18-billion-euros ($22.1 billion) program passed on Thursday and aimed at helping the autonomous regions which, together with local authorities, account for around half of all public spending.

"Valencia, like in other autonomous regions, is suffering the consequences of the liquidity shortage in markets due to the economic crisis," the regional government said in a statement.

The program is funded by the Spanish Treasury but the regions keep full responsibility over the debt.

The troubled regions, as well as a banking sector beset by a burst property bubble, have pushed Spain's borrowing costs to record highs and pushed the country closer to requiring a full-scale bailout.

Euro zone finance ministers approved the terms of a loan of up to 100 billion euros ($123 billion) for Spain to recapitalize its banks on Friday. The exact size of the support will only be determined in September.

But the Valencia announcement sent the risk premium on Spanish government debt to a euro-era high on Friday as its borrowing costs climbed to a record 7.29 percent, a level considered unsustainable, with little relief likely soon.   Continued...

(L-R) Spain's Development Minister Ana Pastor, Spain's Deputy Prime Minister Soraya Saenz de Santamaria and Treasury Minister Cristobal Montoro attend a news conference after a cabinet meeting at Moncloa Palace in Madrid July 20, 2012. REUTERS/Susana Vera