ECB president insists the eurozone will not collapse as Murcia becomes latest region to request funding
Spain's regional woes are expected to weigh on financial markets this week after a second local government in three days asked for state aid, increasing fears that the eurozone's fourth largest economy will be forced to seek a full-blown rescue.
On Sunday Murcia became the latest region to admit it needed central government help, after European finance ministers waved through a €100bn (£77.8bn) recapitalisation of Spanish banks on Friday. Several other regions are expected to follow, with Catalonia reportedly unable to pay the interest on €48bn of borrowings.
Murcia's president, Ramón Luis Valcárcel, said he expected the south-eastern region to ask for up to €300m from Madrid as it struggled to refinance debt and cover its deficit.
"Don't imagine they are going to simply make a present of the money," he said, warning that Spain's prime minister, Mariano Rajoy, would impose strict conditions.
Murcia joins the far larger region of Valencia – which flagged up a cash shortage on Friday – on the list of regional governments that have said they will tap an €18bn liquidity fund set up by the central government just 10 days ago.
Several others among Spain's 17 semi-autonomous regions are expected to follow. They include the two biggest regions, Catalonia and Andalucia, as well as central Castilla La Mancha.
Valencia's announcement that it would seek money from the fund, which an increasingly desperate Spanish government has had to partially finance with a loan from the state-owned lottery company, helped send the country's sovereign bond yields soaring on Friday.
New government GDP projections also pushed up yields by forecasting that the Spanish economy would not grow before 2014. Ten-year bond yields rose to a new euro-era record of 7.25% on Friday, a rate widely seen as unsustainable and pushing the country closer to a bailout from the European Union and the International Monetary Fund.
Markets also reacted sharply to the news. On Friday, the Madrid stock market suffered its biggest one-day fall for two years, while markets in London, Paris and Frankfurt also slipped, with the FTSE 100 falling 1% to 5651.
The coming wave of regional bailouts may add further pressure to Spain's bond yields as they threaten to spiral out of control and drive Spain towards a full rescue.
Rajoy's ministers have urged the European Central Bank (ECB) to buy the country's bonds in order to relieve pressure, but ECB president Mario Draghi told Le Monde on Sunday that it had no plans to buy Spanish sovereign debt. He also insisted that the eurozone was "absolutely not" in danger of breaking up.
"We see analysts imagining the scenario of a eurozone blow-up. They don't recognise the political capital that our leaders have invested in this union and Europeans' support. The euro is irreversible," he told the French newspaper.
"All movement towards financial, budgetary and political union is, for me, inevitable and will lead to the creation of new supranational bodies."
Spain's regional bailouts come as senior figures in Catalonia and Murcia admit they will have trouble meeting the 1.5% deficit target they have been set this year by central government.
"There are reasons to doubt how we will be able to reduce the deficit from 4.4% to 1.5% this year," Valcárcel admitted.
Senior figures in Catalonia have also privately admitted that, although they are making every effort to meet the 1.5% target, the region will also struggle to make it. Strict regional deficit targets are a major part of Spain's strategy as it tries to meet the national deficit target it has been set by Brussels, which wants Spain's overall deficit down from last year's 8.9% of GDP to 6.3%.
Last year's high deficit was mainly due to regional governments which, despite demands from central government that they cut back, increased their joint overspend. They run health, education and social services – accounting for 37% of public spending.
Rajoy has introduced tough new laws and designed the liquidity fund in a way that allows it, if necessary, to take direct financial control of regions that fail to curb their deficits – imitating the control Brussels now exerts over southern European economies.
Artur Mas, the nationalist president of the independent-minded Catalonia region, has warned that full intervention would be unacceptable and has threatened to call regional elections if that happens.
"All regional governments run the risk of being intervened by central government, given that, if you do not meet the deficit target, the state will force you to take measures – that is intervention," Valcárcel explained.
Refinancing regional debt does not add to Spain's overall debt, but covering regional deficits does.
There were fresh protests at the weekend as several hundred demonstrators travelled to Madrid from many parts of Spain to protest over the country's near 25% unemployment rate, as well as the stinging austerity measures introduced by the government in a bid to avoid an international financial bailout. Protesters, many of whom were unemployed, carried banners saying "No cuts" and "United, that's enough".
As well as on Spain, markets' eyes will be on the Greek government and banks this week, analysts at Capital Economics note, following the news that the ECB will stop accepting Greek bonds as collateral for its refinancing operations pending a review by the troika.
"Greek banks can still use these bonds to access funds from the Greek National Bank's emergency liquidity assistance," said Jennifer McKeown at Capital Economics. "But such loans are more costly and this development will clearly add to the already intense pressure on the Greek banking system."
The Greek prime minister, Antonis Samaras, said on Sunday that Greece was now in a "Great Depression" similar to the American one in the 1930s. His comments, made to former US president Bill Clinton, who visited Greece as part of a delegation of Greek-American businessmen, came two days before a team of Greece's international lenders arrive in Athens to push for further austerity cuts.
Germany's economy minister, Philipp Rösler, questioned whether Greece could fulfill the conditions for receiving further international aid and said that the idea of the country leaving the euro had "lost its horror."
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