The €207 billion (HK$2 trillion) debt Spain needs to sell next year will force it to request a bailout, according to investors from Pioneer Investments and BlueBay Asset Management.
"Spain will ask for aid in January," said Tanguy Le Saout, the head of European fixed income at Pioneer Investments in Dublin. "The sooner they ask for help, the sooner the cost of their debt will reduce."
The nation's 10-year borrowing cost is about 5.88 per cent, up from an average 4.77 per cent during the past five years and down from the euro-era record of 7.75 per cent reached in July. Spain, which has fulfilled this year's borrowing programme, is yet to seek aid, a condition of the European Central Bank's bond-buying programme announced in September.
Prime Minister Mariano Rajoy faced his second general strike last week since coming to power, after five austerity rounds in less than a year. Pressured to seek a second bailout by the International Monetary Fund, which predicts a 1.3 per cent contraction of the nation's economy next year as it toils with the second-biggest deficit in the euro zone, Rajoy has said the conditions for aid are not clear.
The ECB unveiled its Outright Monetary Transactions bond-buying plan, on September 6, pledging to spend as much money as needed to restore confidence in bond markets.
The programme provides support to debt-strapped nations on condition they sign up to economic reforms as part of a bailout from Europe's rescue fund.
Investors demand a yield premium of about 453 basis points to own 10-year Spanish bonds rather than German bunds, down from a euro-era high of 650 points on July 25 and exceeding last year's average of 280 points. Rajoy said on November 6 that he needs to know how much the ECB would push down Spain's borrowing costs before his government applied for aid and signed up to the conditions attached. There are 100 basis points in a percentage point.
"You would probably need to have a widening of spreads for Spain to apply," said Lorenzo Pagani, head of Pacific Investment Management's European government bond and rates desk.
Spanish banks' bad loans rose to 10.7 per cent of their outstanding portfolios in September, reaching a fresh high, Bank of Spain data showed yesterday, up from 10.5 per cent a month earlier.