Spain poised for EU bailout
After four years fighting the markets and a mushrooming economic crisis, Spain appears to be poised to cave in and apply for a sovereign debt bailout.
The economic descent has accelerated in the past few days: rising anti-austerity protests, snap elections prompted by independence demands in Catalonia and, at the weekend, a darkening debt outlook.
Hovering over the nation is the imminent threat of a sovereign-debt downgrading by ratings agency Moody's, due by the weekend, which could saddle Spanish bonds with junk status.
The timing could be decided by the EU's calendar; Spain is on the agenda for a meeting of eurozone finance ministers on October 8 and again for an EU summit on October 18-19. Like Ireland, Greece and Portugal before it, Spain, the economy of which is twice the size of all three nations combined, can no longer afford to finance its debt 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 the debt markets in early September by outlining plans to buy the bonds of stricken eurozone states that apply for aid from bailout funds and submit to strict bailout conditions.
But, as Spain hesitates to take the leap, interest rates have edged up again, with investors demanding a return of close to 6% to purchase Spanish 10-year government bonds.
Investors do not expect that the ECB meeting this week will provide much guidance.
"In principle, we don't expect anything new because now it is the turn of the governments to take decisions," Spanish brokerage Renta4 said.
Spain seems to be completing all its homework in preparation for a bailout. On Saturday it delivered to parliament a 2013 budget with à 39-billion in new spending cuts and taxes, and plans for 43 new structural reforms . On Friday, it took a key step by releasing an audit of its 14 major banks, half of which failed a severe stress test and will need about à 59-billion in new capital.
Spain's government has already struck a deal for a rescue loan of up to à100-billion for the banks.
Madrid says it will probably need only about à40-billion from the eurozone loan because the lenders can find much of the cash elsewhere, including by selling assets.
Eurozone and International Monetary Fund leaders welcomed the banking audit results.
Today, Prime Minister Mariano Rajoy will host the EU's economic affairs chief, Olli Rehn. The market reaction will show if Madrid has managed to reassure investors.
"The next hurdle is the bailout, which at this point appears to be inevitable," said Craig Erlam, an analyst at London foreign exchange broker Alpari.
"What matters to the market is that Spain asks for the rescue," said Montserrat Formoso Fraga, an economist for Spanish fund manager Tressis.
Spain's budget and reforms were seen on financial markets as "a step closer to the bailout which, they believe, will solve the problems of Spain and the eurozone", said a report by London foreign currency traders Moneycorp.
In the meantime, the figures seem to be getting worse.
The cost of pumping cash into Spain's troubled banks is expected to help send its public debt to 85.3% of GDP this year and to 90.5% in 2013.
It will also push the deficit to 7.4% of output this year, well above the 6.3% target that the government promised to meet.