After four years fighting the markets and a mushrooming economic crisis, Spain appears finally poised to cave in and apply for a sovereign bailout.
The economic descent has accelerated in the past few days: rising anti-austerity protests; snap elections over independence demands in Catalonia; and, this weekend, a darkening outlook for debt.
Hovering over the nation is the imminent threat of a sovereign debt downgrade by Moody’s Investors Service, which could rate Spanish bonds at the equivalent of junk bonds. The timing could be decided by the European Union’s calendar; Spain is on the agenda for a meeting of eurozone finance ministers on October 8 and again for an EU summit October 18 and 19.
Like Ireland, Greece and Portugal before it, Spain – whose economy is twice the size of all three bailed-out nations combined – can no longer afford to finance its debt on wary markets without help.
The next test comes on Thursday when Spain will try to sell bonds expiring in two, three and five years on the same day that the European Central Bank holds its monthly meeting.
The ECB calmed debt markets early this month by outlining plans to buy the bonds of stricken eurozone states that apply for aid from eurozone bailout funds and submit to their strict conditions.
But as Spain hesitates to take the leap, interest rates have edged up again, with investors demanding a return of close to six percent to purchase its 10-year government bonds. Investors do not anticipate that the ECB meeting this week will provide much guidance.
Though openly fretting over the conditions of a bailout, Spain seems to be preparing for such a rescue.
On Saturday it delivered to Parliament a 2013 budget with €39 billion in new spending cuts and taxes and plans for 43 new structural reforms negotiated with Brussels.
On Friday, the country took a key step by releasing an audit of its 14 major banking groups, half of which failed a severe stress test and will need some €59 billion in new capital.
Spain’s government has already struck a deal for a rescue loan of up to €100 billion for the banks.
Madrid says it will probably need only about €40 billion from the eurozone loan because the lenders can find much of the cash elsewhere, including by selling assets.
Meanwhile public discontent is growing, with anti-austerity protesters packing into central Madrid on Saturday evening for the third night last week.
The strain is showing in particular in the Spanish regions, which are heavily indebted and yet responsible for half of all spending including on health and education.
The powerful northeastern region of Catalonia will hold snap elections on November 25 over an independence drive.
Five regions have asked Madrid for help from a liquidity fund, with the requests already amounting to €16 billion.