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POLITICAL ECONOMY
Spanish cash crunch threatens Catalonia
by Staff Writers
Madrid (UPI) May 25, 2012


disclaimer: image is for illustration purposes only

Spain's growing difficulty with shoring up its debt-ridden banks faced a new setback Friday as an otherwise wealthy autonomous region of Catalonia joined the queue for an urgent bailout to help service its liabilities.

Prime Minister Mariano Rajoy held talks with European Central Bank President Mario Draghi and other EU leaders in Brussels to try and secure ECB funding for Spain, but Draghi's comments after the meeting left unclear the central bank's intentions.

Rajoy is facing tightening conditions for public borrowing by Spain and the prospect of the country facing a crisis similar to the conditions that led to the EU bailouts of Greece, Ireland and Portugal.

Just as the government was considering what to do next to shore up Bankia, Spain's third largest bank, Catalonia emerged as a looming threat to the fragile financial landscape in Spain and eurozone at large.

Trading in the bank's shares was suspended as the troubled bank and Rajoy aides tried to work out a rescue plan. Bankia was part-nationalized on May 9 after three months of government struggles to clean up and streamline banks that are heavily tainted with bad debts, most of them caused by huge real estate loans.

Social unrest is on the rise across Spain as the nation grapples with the highest unemployment -- at least 24 percent of the workforce -- in many decades. Rajoy has seen his measures thwarted by the failure of efforts to reverse the jobless rate and stimulate growth.

Bankia alone is in need of at least $19 billion, while speculation over the needs of other troubled banks remains rife. Dismayed government analysts saw the Catalan request for a bailout as the beginning of another series of cash requests from distressed regions.

Catalan President Artur Mas said, "We don't care how they do it, but we need to make payments at the end of the month," pointing out failure to honor the bills would deal a blow to Catalan efforts to help the government's economic recovery process.

Voter confidence in Rajoy's administration is low while the government faces one demand after another for bailouts. Spanish opinion has little faith in the borrowers' ability to repay, and the government's response has been to try and calm citizens by using indirect lending methods rather than direct bailouts. One of the methods is a restructuring fund that is being used as a lender that expects to be repaid. Spanish opinion sees little likelihood of that happening, however, and sees instead an increased tax burden from current and future bailouts.

There's also skepticism over government assurances that Bankia is the only bank that is likely to need large bailouts while other banks can withstand the onslaught of the debt juggernaut.

The government's bank restructuring fund currently stands at around $7.5 billion, which may not be enough to meet emergencies, making a European Central Bank bailout inevitable.

Standard & Poor's rating agency downgraded Spain in April following projections the state was likely to borrow more to shore up its banks. Catalonia's appeal for funds further clouds that outlook. S&P downgraded Catalan debt by four notches on May 4, putting it at BBB-, just one notch above junk grade. Fitch graded Catalan debt a couple of notches higher, at BBB+.

Catalonia, as the rest of Spain, is under pressure to cut its deficit to meet targets set by Rajoy and agreed with EU partners as part of a eurozone fiscal compact.

The fiscal compact is already under threat from critics of the austerity program, including new French President Francois Hollande, who want more spending to stimulate European growth.

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