In 2007, a year before the crisis, the champagne flowed freely in Valencia, as the city blessed by the clement waters of the Mediterranean on Spain’s east coast celebrated the 32nd America's Cup. Today the 1.8 billion euro marina which provided the base for the renowned international regatta is deserted, as are the hangars which have not been re-used since they housed the individual racing teams five years ago.

For many years cited as a model of economic management under the conservative People’s Party (PP), in power in the region since 1995, today Valencia is being taken to task: for its debt, which, at close to 20% of the region’s GDP, is the highest in Spain, and a budget deficit of 4.6 % in 2011. Worse still, the city will also have to answer questions about “the inappropriate use of public funds”, which according to economist Vicent Soler has been a feature of the last ten years.

The America's Cup is just one example of extravagance associated with a “big events” policy that the region’s government now intends to “downsize”, as regional Vice-President, José Ciscar, explains to Le Monde.

“This superficial economic model made us poorer”

The City of Arts and Sciences, an ambitious cultural complex designed by architect Santiago Calatrava and built beside the former riverbed of the river Turia, which cost taxpayers €1.3 billion, has now been reduced to offering its services as a wedding venue. The city’s 5.4-kilometre long and 14-metre wide Formula One Street Circuit with its 25 bends not only required an initial investment of 90 million euro, but also generates a 20 million euro annual bill for the European Grand Prix which Valencia has pledged to hold until 2014. In Benidorm, the regional government is hoping to recover €65 million from the sale of the €400 million euro Terra Mitica theme park, which was inaugurated in 2000. Half of the park’s staff are threatened with redundancy.

“Over the last decade, we decided to take on debt so as to compete with other regions”, explains Mr Ciscar. “We built 500 km of roads, 420 schools, eight hospitals and dozens of sewage treatment centres. There is no denying the social profitability of the big events, which have created 271,000 jobs and attracted 69 million since 1998.”

Local trade unionists are quick to contest this interpretation. ”We were sold a pasteboard society and now they are attacking the welfare state to make up for their excessive spending,” complains the General Secretary of the Valencia branch of the General Workers Union (UGT), Conrado Hernandez, who, in just one month, will be leading four anti-austerity demonstrations — a reflection of the anger at an extensive range of painful measures, including public service pay cuts, the closure of large numbers of public companies, and increased charges in universities and school canteens.

According to the Valencian Institute for Economic Research (IVIE), the “big events” policy is responsible for 13% of the region’s current debt, which has been estimated at close to 20 billion euros. “Looking beyond the surface of wealth and excess, this superficial economic model made us poorer,” points out Vicent Soler, Professor of Applied Economics at the Univeristy of Valencia. Today per capita income in the region is 12% less than the national average, whereas 15 years ago figures for Valencia were comparable with those for the rest of Spain.

Valencia is now on the verge of bankruptcy

During the boom, construction accounted for up to 14% of jobs in Valencia, which used to be known for its industries. Now the manufacturing of textiles, toys, leather goods, marble slabs, ceramics and metalwork is a shadow of its former self. The change was in part prompted by off-shoring in Asia and Eastern Europe, but also by a lack of finance because “a significant share of capital was reinvested in the construction sector where there were easy gains to be made,” explains the President of the Valencia Chamber of Commerce, José Vicente Gonzalez. “A lot of entrepreneurs did not look after their companies.”

The region’s two savings banks, Bancaja and CAM, were also caught in the property bubble trap. Given their delicate situation, Bancaja was merged with Bankia, the former Caja Madrid, while CAM was nationalised by the Bank of Spain, as was the 100-year-old Banco de Valencia, which was the preferred bank of the local bourgeoisie. “Decisions on the attribution of loans are no longer made in Valencia”, concludes economist and IVIE researcher Francisco Perez.

As it stands, Valencia is now on the verge of bankruptcy. All of the big three ratings agencies, Moody's, Fitch and Standard & Poor's have downgraded the region’s bonds to “junk status”. In December 2011, the Spanish government was obliged to step in to help Valencia renew a Deutsche Bank loan for €123 million which was up for repayment.

“If the funding system does not change and if there is no help from the government, the situation in the region will be unbearable,” points out Mr Perez, who has doubts about Valencia’s ability to respect its spending deficit targets. “The region’s income is not even enough to cover the cost of health care and education.” In short, the party is over in Valencia.