UPDATE 2-Spain's Catalonia seeks government help to pay debt

Fri May 25, 2012 10:00am EDT

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By Fiona Ortiz

MADRID May 25 (Reuters) - Spain's wealthiest autonomous region, Catalonia, needs financing help from the central government because it is running out of options for refinancing debt this year, Catalan President Artur Mas said on Friday.

"We don't care how they do it, but we need to make payments at the end of the month. Your economy can't recover if you can't pay your bills," Mas told a group of reporters from foreign media.

A spokesman for the Catalan government later emphasised that Mas was referring to payments that must be met routinely each month and not a specific deadline this month.

The debt burden of Spain's 17 highly devolved regions, and rising bad loans at the country's banks, are both at the heart of the euro zone debt crisis because investors are concerned they could strain finances so much that Spain, the currency bloc's fourth biggest economy, will need an international bailout.

Catalonia, which represents one fifth of the Spanish economy, has more than 13 billion euros in debt to refinance this year, as well as its deficit.

All of the regions together have 36 billion euros ($45 billion) to refinance this year, as well as an authorised deficit of 15 billion euros.

Last year many of the regions financed debt by falling months or even years behind in payments to providers such as street cleaners and hospital equipment suppliers.

This year the central government provided them with a special credit facility from the Official Credit Institute, or ICO, to pay providers, of which Catalonia has taken 2 billion euros.

The provider credit lines from the ICO run out in June and the central government has pledged to come up with a new mechanism for backing debt from the regions, which have been mostly priced out of international debt markets since the Greek rescue in 2010.

Catalonia's Mas, from the centre-right Convergence and Union Party, said he is running out of options. In the past two years Catalonia has placed patriot bonds, at 4.5 percent to 5.0 percent, but he says the capacity for the people of the region to buy such bonds is at its limit.

A quarter of all Catalan savings are already in patriot bonds, he said.

The other option would be short-term financing from banks, but Catalonia's neighbour, the region of Valencia, recently paid 7 percent for a six-month loan, a level seen as unsustainable.

Catalonia's annual interest payments have already doubled in the last two years, to 2 billion euros this year.

Mas said the central government should issue so-called Hispanobonos to help out the regions, priced at the average interest rate that the regions would have to pay for debt from other sources.

Government sources have told Reuters that Economy Minister Luis de Guindos and Treasury Minister Cristobal Montoro disagree on the final form of the mechanism to back regional debt.

S&P credit rating agency cut Catalan debt by four notches on May 4, putting it at BBB-, just one notch above junk grade.

Fitch has graded Catalan debt a couple notches higher, at BBB+.

Catalonia's deficit was supposed to be cut last year to 1.3 percent of gross domestic product, but the regional government overshot that by close to three times.

This year it is struggling to reach a deficit target of 1.5 percent of its economic output, a goal many economists see as impossible given that the Spanish economy is set to shrink this year by about 1.5 percent.

Catalonia has cut public sector wages, instituted a tourism tax and a 1 euro charge to fill each medical prescription, applied the maximum surcharge on gasoline and frozen infrastructure investments to try to get the budget under control.

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