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VALENCIA, Spain (Reuters) - Once the beacon of Spain's new economic grandeur, the Mediterranean region of Valencia has become a symbol of all that is wrong with the country.
Over the last decade, surfing on a property boom, Valencia spent billions hosting the America's Cup sailing competition and the European Grand Prix motor race, launching Hollywood-style movie studios, and building the biggest aquarium in Europe, a Sydney-style opera house and several museums.
But now years of free spending, coupled with a hangover from a burst real estate bubble and the collapse of local banks, have put Valencia on the brink of being bailed out by the central government - which has huge budget problems of its own.
The building sector's implosion has forced into the open allegations that corrupt Valencian politicians, developers and bankers were in cahoots during a decade of easy money at low interest rates after Spain joined the euro in 1999.
Valencia and other indebted regions have become a liability for Prime Minister Mariano Rajoy, in office since December, as Spain sinks into a second recession since 2009 and investors speculate that it may follow Greece, Portugal and Ireland into the arms of an international bailout.
Valencia's problems are particularly embarrassing for Rajoy, who has made austerity central to his policies, as his centre-right People's Party has run the region since 1995, being re-elected four times in the process.
"They said it was all to put Valencia on the map, and that's what they did, put us on the map, for corruption, for waste ... bringing shame on Valencia," said Ignacio Blanco, a member of the regional legislature for the leftist Esquerra Unida party.
Valencia, home to five million people, is not the only one of Spain's 17 autonomous communities with debt problems.
Several of the regions, which account for close to half of all public spending in Spain, are facing liquidity problems and their massive overspending pushed the country's 2011 budget deficit to 8.5 percent of gross domestic product, overshooting a 6 percent target agreed with the European Union.
Valencia can no longer borrow funds from the banks or markets. Standard and Poor's credit agency rates Valencia's bonds as junk and said in February that the central government would probably have to provide further extraordinary support to help the region to service its debt in 2012.
If it cannot cut its deficit drastically Valencia may become the first of the autonomous communities, which control their own health and education spending, to have its budget taken over by the central government under new austerity laws.
In January the regional government delayed a 123 million euro ($162.80 million) payment to Deutsche Bank by a week and local press reports said the central government had to underwrite the payment.
Valencia's finance head did not respond to repeated requests for an interview on the region's debt situation.
The Generalitat, as the Valencian government is known, is sitting on 4 billion euros in unpaid bills to street cleaners, healthcare suppliers and other providers. The central government is now providing emergency lines of credit to get the providers, many of them small companies, paid.
In return for the loans, Valencia must cut its deficit to 1.5 percent of its economic output from 3.68 percent last year.
Beyond the money owed to the providers, Valencia has 20 billion euros in other debt, the second biggest regional pile after its wealthier northern neighbour Catalonia. Valencia and Catalonia are Spain's two most indebted regions, both with debt equalling 20 percent of their yearly economic output.
The Generalitat is drastically tightening its belt in administrative spending, as well as health and education.
In February, thousands marched in the city of Valencia, the regional capital, after students complained they had to take blankets to class because the schools could not afford to pay for heating.
Vicent Baggetto, a spokesman for the association of Valencia's public school directors, said about 60 schools might have to close down as they are not receiving enough money from the regional government to operate properly.
"We are in a part of the tunnel where we don't see the light, so we don't know if we're moving forward or backward or even if we're moving at all," he said,
In the hospitals, nurses and doctors complain they lack syringes and beds.
"The (central) state has to get us out of this quagmire or we won't get out of it," said Vicente Peiro Romero, a lawyer who acts as a spokesman for a group of 35 suppliers of material for hospitals - medical equipment, surgical gloves and the like - who have not been paid by the regional government for the last three years.
Last Friday the regional government raised taxes and university fees, and privatised chunks of healthcare. This followed spending cuts of about 1 billion euros announced earlier this year along with layoffs of public employees.
"We don't need anybody to come and save us," said Maximo Buch, Valencia's economic councillor, when he presented plans to cut the region's deficit.
Alfonso Grau, the head of finance for the city of Valencia, said local authorities can manage without being rescued.
"Obviously we have had to stop any investment but over the last two years we invested about 500 million euros, the normal amount for eight or nine years," he told Reuters.
"Today we're in shape to assume the cost of these investments, maintain our day-to-day spending and look at the future with a sense of tranquillity."
The city of Valencia, home to one of the Mediterranean's busiest container ports and famed for its saffron-laced paella rice dish, indulged in spending as much as the region that surrounds it. Parks, fountains and palm trees line the wide avenues of new neighbourhoods, conferring a Californian air on the ancient Roman settlement.
Valencian beach resorts such as Benidorm, a favourite with British and German tourists, are today known as much for the concrete skeletons of buildings left after financing evaporated as for their sunny weather.
Valencian savings banks, or cajas, loaned recklessly to local builders. Like other cajas all over Spain, the lenders had local politicians on their boards who steered them into development projects without managing the risk.
Banco de Valencia, a century-old lender, was rescued by the central government last year and is now being auctioned off.
Caja de Ahorros del Mediterraneo (CAM), a 135-year-old savings bank, was called "the worst of the worst" by Bank of Spain Governor Miguel Angel Fernandez Ordonez after it was also taken over in 2011 following an 8-billion euro hole in its balance sheet.
Spaniards were scandalised when it came out that CAM executives paid themselves 13.3 million euros in compensation as the company was being rescued.
And Bancaja, the largest Valencian savings bank, was forced to merge in 2010 with other cajas to form a new bank, Bankia, which is now the Spanish lender most burdened with toxic real estate assets.
A financial sector source, who asked not to be named, said that even after due diligence on Bancaja's books, it was not until after the merger that the extent of its exposure to the property sector became clear.
"The banks are the perfect reflection of what happened in the region. Political ties and obsession with short term profit led to a mad credit policy in which no assessment of the risk was made," said the director of a Bankia branch who asked not to be identified by name.
From an unused airport to overbilling during a papal visit, allegations of corruption have touched every corner of Valencian life. The president of the Generalitat, Francisco Camps, had to step down last year to face charges of accepting expensive suits in exchange for handing out government contracts. He was later acquitted.
Carlos Fabra, who served for 16 years as president of Castellon, one of the region's three provinces, has been charged with bribery and tax fraud.
Fabra is the man behind Valencia's most spectacular white elephant, the 150-million-euro Costa-Del-Azahar airport. "Do you like grandpa's airport?" he asked his grandchildren at the opening last year.
"Grandpa's airport" has yet to receive a single commercial flight.
Even Pope Benedict's 2010 visit to Valencia was tainted. An investigating magistrate has charged local politicians and a media group with colluding to overcharge the government for sound and video system services during the visit, then sharing the extra money among themselves.
In December, the mayor of the Valencian town of Manises and head of the public water treatment company, Enrique Crespo, was charged with looting 25 million euros from the company, EMARSA. Prosecutors say the money was spent on jewellery, luxury goods and monthly meetings at four-star hotels with bills for Romanian interpreters, who were actually prostitutes.
More recently, several top officials were put under arrest for allegedly diverting money earmarked for building hospitals in poor countries.
"Creating a structure to steal money from poor children: now that is a case of complete moral bankruptcy," said Luis Bellvis, a local economist who owns an hotel in Valencia's old town.
Editing by Fiona Ortiz; editing by David Stamp