Financial markets severely shaken by Spain’s financial outlook and Valencia’s request for assistance

Barcelona (ACN).- Spain’s economic outlook and Valencia’s formal request to the government for financial assistance unnerved the markets on Friday, despite the austerity measures announced recently and the approved 100bn bailout for the Spanish banking sector. The Spanish government expects an unemployment rate of 24.3% and a fall in GDP of -0.5% in 2013, expecting to be out recession by 2014 and 2015 with a GDP growth of +1.2% and 1.9% respectively. Valencia is the first region to ask for emergency financing from the Regional Liquidity Fund (FLA), a system set up in order to allow the autonomous communities to access funds, but under strict guidelines.

The approval of the 100bn bailout by euro zone ministers has been overshadowed by Valencia’s request to access the Regional Liquidity Fund (FLA) which was set up last Friday. The appeal for financial assistance pushed the yield on Spanish 10 year bonds to an unsustainable 7.28% and has caused Spain’s Ibex stock index to fall. The government’s projections for 2013 have compounded the economic misery for Spain, a sentiment shared by the markets.

The fears over Spain’s economic situation have sunk the euro to an 11 year low against the Yen, a 3 year low against the pound and a 2 year low against the dollar. Spain’s financial condition and current fragility is putting tremendous strain on the Eurozone and confidence in the Euro is at a worrying low.

The pessimistic outlook for the Spanish economy comes at a time of great tension between the central government and some of the autonomous communities, like Catalonia. The Catalan government has criticised what it considers to be a “disloyal” attitude from Madrid towards the regions. Mariano Rajoys’ government has cut the deficit targets for the autonomous communities, thus making it harder to meet the objectives. Already implementing 10% spending adjustments in Health and Education, the new targets are almost impossible for Catalonia to meet.

Catalonia is, like Valencia, one of the most indebted autonomous communities in Spain. The financial situation in Catalonia is critical because the government is already implementing harsh austerity measures but does not receive all the money it should from Madrid to finance its services. The so-called ‘fiscal deficit’ means that about 9% of the Catalan GDP is paid in taxes to Spain. This money never comes back to Catalonia in the form of investments or services and Catalonia struggles to finance basic services despite being one of the most populated and richest autonomous communities in Spain. In order to pay for those services, the Catalan government has been forced to issue bonds at high interest rates, thus increasing its debt.

President Artur Mas is planning to ask Madrid for a new ‘fiscal pact’ that would help Catalonia receive a ‘fair deal’ from Spain. However, the possibility of receiving such a new system seems unlikely in the current economical situation. The future is, then, as uncertain as ever.