* Municipal workers in southern town owed 8 months' wages
* Staff still turn up for work, hoping for back wages
* Business groups want suppliers paid from bailout fund
* Moving no solution as crisis affects all of Spain-family
By Tracy Rucinski and Clare Kane
MADRID, Oct 18 (Reuters) - Overdue bills are piling up at Spain's regional governments and town halls, only months after Madrid staged a rescue that was meant to end the shame of unpaid workers and suppliers.
Financial crisis in the layers of administration below national level is hurting everyone from Spain's biggest corporations to local staff who would be among the lowest-paid workers - but for the fact they often aren't being paid at all.
Inma Martinez, a separated mother of four, is one such victim of attempts by regional and local governments to finance their budget deficits by delaying payments.
Like her fellow municipal employees in the southern town of La Linea de la Concepcion, she is owed eight months of unpaid wages. Nevertheless, she turns up every day to clean the bus station, fearing that if she stays at home the town hall will fire her, probably ending any chance of recovering her wages.
Martinez, 47, has been reduced to begging for food with other local families at a shopping centre in La Linea, which nestles next to the British territory of Gibraltar.
"We just want help with food ... it's very hard for the church to help everyone at the moment," said Martinez, who has worked as a cleaner in the Andalucian coastal town for 14 years.
Now Martinez, whose children are aged from 12 to 27, says she is suffering from depression because of the uncertainty over her job. "People have lost everything - their cars, their houses. The situation is really, really bad and they won't give us any concrete information," she said.
This should not be happening. Earlier this year Prime Minister Mariano Rajoy offered a 30 billion euro ($39 billion)bailout to cover months, or even years, of unpaid bills for services ranging from health care to waste management.
The credit line was supposed to be a one-off deal for municipalities and the 17 autonomous regions such as Catalonia and Andalucia, whose problems lie at the heart of concerns that the central government itself will need a euro zone rescue.
Regional and municipal governments badly missed targets for cutting their budget deficits last year. This year they are under huge pressure from Madrid to lower their deficits to a total of 1.5 percent of Spain's annual economic output from 3.3 percent last year. This implies 18 billion euros of savings.
Rajoy's original bailout was designed to settle unpaid bills and wages run up before the end of 2011.
But Spain is in recession and the resulting fall in tax revenue is cancelling out the regions' cost-cutting, so they have resumed trying to meet this year's deficit targets by letting the bills pile up once again.
Already the central government has had to step in with a second bailout worth 18 billion euros, this time to help the regions to meet their obligations on bond borrowings.
Business groups want Madrid to let the local and regional governments use funds from the second bailout - the regional liquidity fund - for paying suppliers as well as making debt payments, said sources representing major Spanish companies.
"The sector is in talks with the government to first use 2.5 billion euros left over from the original credit line to cover debt to June 30, and then resort to the regional liquidity fund," a business source with knowledge of the talks said.
Building and services firm FCC and the city cleaning or services subsidiaries of listed infrastructure firms such as ACS, Ferrovial and Sacyr have all been affected by unpaid bills.
So have pharmaceutical and health care companies such as Roche and Sanofi. Their lobby group Farmaindustria said the regions seemed to be stacking up unpaid bills at a faster pace this year than in the past, having accumulated 1.5 billion euros of debt to its members by June.
"The government has enough ammunition right now to solve the current situation. The issue is ensuring that the bad behaviour doesn't repeat itself," the business source said.
The regions are responsible for administering health care and other services. For years Spain's property boom yielded fat tax revenues and they adjusted their spending accordingly.
However, the real estate market crashed four years ago and tax revenue has consequently also dived. Poor management on all levels of government has worsened the problem.
"Spain based its spending on a property bubble, as if it was going to be getting those revenues forever," said J. Ignacio Conde-Ruiz, an economist at the Fedea think tank.
Rajoy's last round of austerity measures, worth 65 billion euros, includes reforms to streamline local administrations and cancel town hall services that cannot be financed.
La Linea typifies the plight of citizens whose livelihood depends on public budgets. The local government, the town's biggest employer, has simply stopped paying its 800 workers their regular wages. Staff did get last year's Christmas bonus, but only two weeks ago.
Government employees have little chance of finding any other work in the town if they leave their posts. Martinez said one colleague who decided to quit is now out of a job.
La Linea has no industry and little tourism, despite lying next to the visitor magnet of Gibraltar. Unemployment is close to 40 percent, far above the national rate of 25 percent which along with Greece is already the highest in the European Union.
Residents say Mayor Gemma Araujo, a Socialist, should negotiate a better deal for the town in paying off its debts and prioritise paying staff.
Araujo admitted that municipal workers were owed a total of eight months' back wages. However, she denied they had gone eight consecutive months without getting anything, saying some payments had been made in June.
She blamed the mess on the town's previous administration, which was run by Rajoy's conservative People's Party. "When we took over a year and a half ago, we discovered the situation was totally chaotic at the town hall. There was 132 million euros of debt to providers," she told Reuters.
Now 70 percent of municipal income is being used to pay off the debts, leaving little to run services or pay staff.
Araujo and her senior staff are still drawing their own, albeit sharply reduced, salaries. "The salaries of the mayor and other top officials have been cut by 70 percent." she said. "Now we need to stabilise the pay situation."
Already her workforce is demoralised. Mercedes Corbacho, who restores religious art and directs a museum in the town, said there was little stomach for a fight over the unpaid wages. "There are no strikes, there's no pressure. The last protest I went to there were five people there," she said.
Corbacho said she has started to fall behind on mortgage payments for the family home, though at least her school teacher husband is still being paid.
"I have to pay for my resources myself now ... We don't have internet (at the museum), I don't even have a computer," she said. Her husband has suggested they move elsewhere with their two children aged 3 and 5, but they are reluctant to leave.
"Things are bad all over Spain, but we can't work without being paid," she said.