MADRID – 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 neighbour Catalonia, sought help under an 18-billion-euros ($22.1 billion) programme 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 programme 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 recapitalise
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.
The euro fell as low as $1.2175, just above a two-year low of $1.2162 hit last week, while U.S. and European stocks also slid.
Despite its downgraded GDP forecasts the government confirmed its deficit objectives for 2012 and 2013 but did not release the details on how the efforts would be split between the regions and the central government this year.
It will use the new forecasts as a base to draw up the 2013 budget, for which the ceiling has been set at 127 billion euros compared to 119 billion euros in 2012.