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The major Spanish region of Catalonia said Tuesday it may seek government rescue aid, heightening fears that Spain would need a full international bailout.The Spanish stock market continued a plunge that began on Friday, after Catalonia's finance minister raised the prospect of a regional bailout and Spain's borrowing costs rose in a sign of ongoing market tension.
Financial daily El Economista meanwhile reported that the Spanish government wants a partial bailout from European partners to meet immediate financing needs and avoid an imminent collapse.
Asked about whether Catalonia would need to ask for funds from the Spanish state, regional finance minister Andreu Mas-Colell told BBC radio: "Yes. The current situation is: Catalonia has no other bank than the government of Spain."
A Catalonia official told AFP the region had not yet decided on a formal request for government aid but that it was "an option being considered."
"We are studying the conditions of the regional liquidity funds," the official said. "The markets are closing to the Spanish regions."
Another big region, Valencia, last week became the first to apply for help from an €18-billion ($122-billion U.S.) fund set up by the central government to rescue struggling regions.
Economists warn that a euro zone bailout of up to €100-billion agreed for Spain's banks may not be enough to get the country through the crisis brought on by the collapse of its real estate boom in 2008.
"The position of the regions, which appeared under control at the beginning of the year, has clearly deteriorated (and) of the 17, about six will ask for help," said Cyril Regnat, an analyst at Natixis bank.
"You have the regional and banking problems compounding the problems of the state and that explains the particularly violent reaction on the bond markets."
Fitch Ratings said Tuesday that the Spanish mortgage market was "set for further deterioration," as a result of "worsening unemployment and the loss of benefits for some long-term unemployed.
"We do not anticipate house prices to reach their low point until 2014 because of the slow speed of the price correction," a Fitch statement said.
Meanwhile, the yield or rate of return on the benchmark 10-year Spanish government bond crept higher Tuesday, at 7.552 per cent, hovering at the levels that forced Greece, Ireland and Portugal to seek EU-IMF bailouts.
At such high rates, it is impossible to raise funds on the market, said Daniel Pingarron at IG Markets, forecasting that Spain could only hold out for two months.
"Spain currently has about €30-billion in the treasury. With that, it can cover debt due in July, in August and perhaps in September but in October there is a very large sum due," Mr. Pingarron said.
In a fresh debt auction on Tuesday, Spain sold 3-month bills at 2.434 per cent, up from 2.362 per cent at the last similar auction in late June, with six-month bills rising even more sharply, to 3.691 per cent from 3.237 per cent.
Analysts said Spain needs either a bailout or market intervention by the European Central Bank to force its borrowing costs down by buying bonds.
The ECB has done this before but is not clear if it is ready to step in again now without clear backing from the major euro zone states, especially Germany.
"Until that happens, Spain's financing prospects get fewer and rumours of a possible bailout grow," wrote analysts at Spanish brokerage Renta4.
The Madrid stock market slumped below the symbolic 6,000 points mark in afternoon trade and was down by 3 per cent after Mas-Colell's comments.
El Economista, citing unnamed government sources, said Spain's government wants a credit line to cover €28-billion in debt maturing in October since raising the money on the financial markets was now too expensive.
"It is clear that the situation is unsustainable (and) that the government cannot hold out much longer," said Alberto Roldan at Inversis brokerage.
"October is looking like the deadline."