MADRID – Spain's financial worries increased Tuesday after another of its struggling regions asked for central government aid to stop it from defaulting on its debt, adding further pressure on the country as it tries to avoid an international bailout.
The northeastern region of Catalonia said Tuesday it would seek €5.02 billion ($6.29 billion) in aid from the central government, adding to the country's financial troubles as it also struggles to keep its banking industry from crumbling under the weight of toxic loans and assets from a collapsed property market.
Catalonia, which has Barcelona as its capital, becomes 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 Spain's 17 semi-autonomous regions, which can set their own budgets and spending plans, are struggling in the country's double-dip recession. Some of the regions, which take up almost 40 percent of public money, have overspent and are unable to borrow on financial markets to repay their huge debts.
Spain's regions have a combined debt of €145 billion and some €36 billion must be refinanced this year. Catalonia alone owes more than €42 billion. The government fund, which was set up on July 13 to help rescue the regions, has €18 billion in capital, part of it raided from the national lottery.
Catalonia's request for aid comes as revised figures by the National Statistics Institute showed said Spain's economy contracted by 1.3 percent in the 12 months through the second quarter, more than previous estimates of 1 percent.
The institute confirmed the second quarter's 0.4 percent drop from the previous three-month period. The government estimates the economy will contract 1.5 percent this year and 0.5 percent in 2013.
Meanwhile, the country's banks have been locked out of financial markets because of investor doubts about their financial health. The government has already asked for loan of up to €100 billion ($123 billion) from the other 16 countries that use the euro for its most troubled lenders although it has yet ask for any of it.
If Spain needs extra money to protect its banks and stop its regions from defaulting on their debt, the central government will either have to issue debt at punishing rates or ask for a sovereign bailout from its fellow eurozone countries.
Both Prime Minister Mariano Rajoy and European Council President Herman van Rompuy, who met one another for talks in Madrid Tuesday, denied that Spain was in talks for such a bailout.
"There are no negotiations," said Rajoy. However, neither of them denied the possibility that Spain will eventually need help.
Van Rompuy said the EU was aware of the great efforts in reforms and austerity measures that Spain was making to its obligations to cut its deficit and said its European partners were agreed on helping the country. Rajoy is to meet French President Francois Hollande on Thursday and German Chancellor Angela Merkel on Sept. 6.
Market concern over Spain's ability to control its finances in the face of all these problems have pushed the interest rate — or yield — on its debt to levels that would make it increasingly difficult for the government to continue paying in the long-term.
Spain and Italy are hoping that the European Central Bank will approve next week a proposal to intervene in bond markets to lower the borrowing costs of heavily indebted eurozone countries. By buying bonds, the ECB would push their yields down.
ECB president Mario Draghi Tuesday cancelled a trip to meet of other central bank governors in the U.S. this weekend so that he can concentrate on the bond-buying plan.
Expectation that such a plan will be approved in some form next week at the ECB's monthly policy meeting have already brought down borrowing rates for Spain and Italy.
The impact was evident in Spain's latest bond auction on Tuesday, when the Treasury sold nearly €4 billion in short-term debt auctions at much lower interest rates.