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By Mike “Mish” Shedlock, globaleconomic analysis blog,

The Spanish economic implosion continues. Various austerity measure in Europe and rate hikes by ECB president Jean-Claude Trichet will make matters worse. Some town mayors readily admit bankruptcy. Others will follow.

Please consider Spanish towns face funding crisis, rack up debts

In this hillside town, topped by a medieval castle and surrounded by olive groves, the 120 municipal workers haven’t been paid since May. Police have new orders not to use their patrol cars unless they get word of a traffic accident or a crime in progress.

The town pool is closed for the summer despite temperatures over 104 (40 Celsius) in the shade. Fees for the public day-care center have doubled. Water bills will soon go up 33 percent and local business owners are seething over €9 million ($12.7 million) in unpaid bills owed by the town hall, much of it to them.

Spain’s 8,115 municipalities are being hit by a crushing revenue hangover from a nearly two-decade building boom that went bust in 2008. Officials in Moratalla believe they are the first in Spain to publicly declare their town is on the verge of going broke — and that the only way out is an unprecedented program of drastically reducing services while boosting local taxes and fees in an austerity drive that could last eight years.

Moratalla and its mammoth debt “are the mirror image of a lot of towns” that have not yet fully admitted the extent of their dire financial circumstances, said Deputy Mayor Juan Soria. “These are hard measures, but they’re necessary and I think we have to reinvent ourselves because we’ve lived beyond our means and we have to lower expectations.”

Many towns are struggling to meet payroll, can’t fire workers because of public service employment rules, are frequently making late payments to the health care system and are trying to delay or restructure debt they took on for costly infrastructure projects.

The nation could be next in line for a bailout after Greece, Ireland and Portugal — and some in Moratalla say the example of their town shows Spain will need help from the European Union, despite pledges by federal officials that Spain won’t need a bailout.

In Moratalla, population 8,500, Soria cringed at the idea of merging with a neighboring town, but said his community is functioning in constant crisis mode. Two weeks ago, Moratalla’s two gas stations stopped filling the tanks of municipal vehicles when the owners lost all faith the town would ever pay €120,000 ($170,000) in outstanding fuel bills.

“They have told us that they don’t know when, how or even if they are going to be able to pay us,” said Jose Antonio Martin, who owns one of the gas stations. He is convinced the town needs a bailout from the regional government of Murcia, though it has debt problems of its own.