Spanish Debt Woes Escalate As Catalonia Seeks Bailout

Spanish Debt Woes Escalate As Catalonia Seeks Bailout - The Spanish region of Catalonia sought a financial rescue from the government on Tuesday even as Prime Minister Mariano Rajoy repeated his earlier remarks that the country will not request for a full-blown international bailout.

Catalonia, the most indebted of Spain's 17 autonomous regions, requested for a EUR 5 billion bailout from the EUR 1

8-billion rescue fund, set up by Madrid to support its debt-ridden regions. Valencia was the first Spanish region to ask for a bailout, followed by Murcia.

Rajoy, after his meeting with European Union Council President Herman Van Rompuy, said that the region would get enough support. "We will help Catalonia as we did for the rest of the regions", he said.

Both Rajoy and Van Rompuy denied that Spain is in talks for a broader bailout. "The government has made no request for it", Van Rompuy said.

Eurozone nations have committed as much as EUR 100 billion to a European assistance program specifically targeted to the restructuring of Spain's financial sector. Out of this, some EUR 30 billion have already been approved.

Despite harsh spending cuts introduced by the Rajoy government, Spain is tipped to miss this year's budget target, partly due to its deepening recession.

The economy contracted 0.4 percent quarter-on-quarter in the second quarter, following a 0.3 percent contraction in the first quarter. Annually, the gross domestic product shrank 1.3 percent, more than 1 percent estimated earlier.

Moreover, revised GDP figures from the statistical office revealed that Spain's economic performance in the past two years has been worse than thought. The statistical office revised down the GDP figures to show a steeper-than-estimated 0.3 percent contraction of the economy in 2010. The 2011 GDP growth rate was revised down to 0.4 percent from previously reported 0.7 percent expansion.

The government also faces a daunting task of reducing deficit amid high borrowing costs. Though recent positive comments from European leaders, including European Central Bank President Mario Draghi, have helped ease the borrowing costs, they still remain much higher compared to that of Germany.

Also, Spain has the highest unemployment rate in the European Union. One in four Spaniards are out of work, with the youth bearing the brunt of the severe labor market condition.

Rajoy said Tuesday that the main challenges before the government were to stimulate economic growth and create employment.

Rajoy is to meet French President Francois Hollande on Thursday and German Chancellor Angela Merkel on September 6.

The European Central Bank will hold its next meeting in Frankfurt on September 6 and the market is awaiting hints on the central bank's proposed bond-buying program, which could help ease borrowing costs faced by euro members such as Italy and Spain.