Spain set to seek euro-zone bailout, budget and banking audit suggest

After four years fighting the markets and a mushrooming economic crisis, Spain appears poised to cave in and apply for a sovereign bailout.

Hovering over the nation is the imminent threat of a sovereign debt downgrade by Moody's Investors Service that 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 euro-zone finance ministers next Monday and a European Union summit from October 18 to 19.

Euro-zone ministers will also consider Greek request for a two-year extension for the reform package.

But more importantly for Athens, senior representatives from the European Union, the International Monetary Fund and the European Central Bank - Greece's "troika" of creditors - returned to Athens yesterday, with a meeting between them and Finance Minister Yannis Stournaras slated for today.

The trio had given Prime Minister Antonis Samaras's coalition government a week to finalise the austerity package worth €13.5 billion (HK$135 billion) in order to unlock €31.5 billion in frozen EU-IMF loans.

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 (ECB) holds its monthly meeting.

The ECB calmed debt markets early last month by outlining plans to buy the bonds of stricken states that apply for aid from euro-zone bailout funds and submit to their strict conditions. But as the Spanish government hesitates to take the leap, interest rates have edged up again, with investors demanding a return of close to 6 per cent to purchase its 10-year government bonds.

Investors do not anticipate 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 Renta 4 said in a report.

Though openly fretting over the conditions of a bailout, Spain seems to be completing all its homework in preparation for such a rescue.

On Saturday, it delivered to parliament a 2013 budget with €39 billion in new spending cuts and taxes, as well as 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.

The Spanish 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 euro-zone loan because the lenders can find much of the cash elsewhere, including by selling assets.

Euro-zone and International Monetary Fund leaders welcomed the banking audit results.

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 euro zone", according to a report by London-based foreign-currency traders Moneycorp.

In the meantime, public discontent is growing, with anti-austerity protesters packing into central Madrid three nights in a row 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.

Anger against austerity measures surfaced in France also yesterday with thousands marching in Paris, in a march organised largely by the "Left Front" party and the Communists. The rally comes ahead of the French parliament's debate this week on a European fiscal treaty.

Additional reporting by Associated Press