Market jolted as Valencia asks Madrid for assistance

MADRID • Spain’s heavily indebted eastern region of Valencia said 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% in 2012.

Valencia, Spain’s most indebted region alongside its northern neighbour, Catalonia, sought help under an ¤18-billion ($22.5-billion) program passed 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.

The program 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.

Eurozone finance ministers approved the terms of a loan of up to ¤100-billion ($124-billion) for Spain to recapitalize its banks Friday. The exact size of the support will be determined in September.

But the Valencia announcement sent the risk premium on Spanish

Valencia is suffering

the consequences

government debt to a eurozone high Friday as its borrowing costs climbed to a record 7.29%, a level considered unsustainable, with little relief likely soon.

The euro fell as low as US$1.2175, just above a two-year low of US$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 compared to ¤119billion in 2012.

Spain’s regions, currently shut out of international debt markets, have been pushing for months for a financing mechanism to help them meet their financial obligations.

Jose Ciscar, the deputy regional head who made public Valencia’s request, said it would now be in position to meet its financial obligations.