Spain's Catalonia requests billions in rescue aid

(AP) MADRID - Spain's northeastern region of Catalonia said Tuesday it will seek 5.02 billion euro ($6.29 billion) in rescue aid from a central government fund, underscoring the extent to which even the country's more powerful centers of industry and business are unable to manage their debts.

Catalonia, which has Barcelona as its capital, became the third region after Valencia and Murcia to officially solicit aid. Many of the 17 semi-autonomous regions are struggling with the recession, the country's second in three years, following a real estate crash in 2008 that has pushed the unemployment rate to near 25 percent.

Because the regions are unable to borrow on financial markets to repay their huge debts, they are being forced to impose severe cutbacks. When that is not enough, they must ask the central government for help.

Spain's regions have a combined debt of 145 billion euro and some 36 billion euro must be refinanced this year. Catalonia owes more than 42 billion euro.

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The government fund, which was set up on July 13 to help rescue the regions, will have 18 billion euro in capital, part of it raided from the national lottery. If more is needed, Spain's central government will either have to issue debt at punishing rates or ask for a sovereign bailout from its fellow eurozone countries.

It is becoming increasingly likely that Spain will have to ask for such as bailout as its economy struggles to recover and generate revenue for the government.

Revised figures released Tuesday by the National Statistics Institute showed Spain's recession is deeper than expected - the 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.

"The latest data for the second quarter show that the downturn in the Spanish economy is deeper than previously thought and accelerating," said from Robert O'Daly, senior economist for the Economist Intelligence Unit.

He said that data revisions suggest the Spanish and Italian economies are on similar paths as both countries suffer the effects of fiscal austerity and weaker external demand.

"Their deteriorating growth prospects will make fiscal consolidation efforts all the more challenging and possibly counterproductive," said O'Daly.

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.

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 â,¬4 billion in short-term debt auctions at much lower interest rates.

The Treasury sold 1.67 billion euro in three-month bills at an average interest rate of 0.95 percent, down from 2.43 percent in the last such auction July 24. It sold 1.93 billion euro in six-month bills on a yield of 2.03 percent, down from 3.69 percent.

Conservative Prime Minister Mariano Rajoy was meeting European Council President Herman van Rompuy on Tuesday for talks on the crisis and will meet French President Francois Hollande on Thursday.