Mariano Rajoy, Spain's prime minister, steered the embattled nation towards a €300bn (£237bn) bailout yesterday as he said he was ready to act "in the best interests of the Spanish people".
Mr Rajoy, who is struggling to convince dubious markets that he can bring Spain's deficit back under control, has already asked for €100bn from Europe's bailout pot for its debt-laden banking system. He inched closer to seeking a full-blown rescue yesterday as he said Madrid would have to carefully examine the conditions of such a bailout.
His comments came after European Central Bank president Mario Draghi disappointed markets on Thursday by failing to deliver immediate aid to turbulent debt markets, which have pushed Spain's cost of borrowing to unsustainably high levels.
Mr Draghi said the central bank was considering buying up the debt of eurozone strugglers, but crucially he also stressed that nations themselves would have to formally request a bailout from the European Financial Stability Facility. This is likely to come with harsh financial conditions and austerity measures.
Marchel Alexandrovich, an analyst at Jefferies, said: "What Draghi has basically indicated is that the problem in the bond markets has to get considerably worse before the ECB steps in to help."
Mr Rajoy said he wanted to see more details on the "non-standard measures" being planned by the ECB – likely to be bond market intervention – before deciding on a course of action. Spain's benchmark borrowing costs slipped back below the 7 per cent danger mark yesterday, although they still remain worryingly high at 6.77 per cent.
He said: "I will do, as I always do, what I believe to be in the best interest of the Spanish people... What I want to know is what these measures are, what they mean and whether they are appropriate and, in light of the circumstances, we will make a decision, but I have still not taken any decision." Sources said Spain had for the first time conceded at a meeting between Luis de Guindos, its economy minister, and German counterpart Wolfgang Schäuble it might need a full bailout worth €300bn, although Rajoy's office denied the talks.
Spain already complies with stringent EU and IMF demands to reform its economy, and last month announced a €65bn package of tax hikes and spending cuts.
A full-scale bailout would be a huge political embarrassment for Mr Rajoy, who claimed "victory" in June after securing a €100bn recapitalisation of its struggling banks. Spain's banks are laden with almost €200bn in sour loans from a bust property boom, and the government was forced to nationalised the fourth-biggest lender Bankia in June.
Madrid fears it could be asked for further reforms of the pension system – the last campaign pledge the centre-right prime minister has not been forced to break since winning office less than a year ago.
Any further cuts are likely to trigger more protests after hundreds of thousand of Spaniards took the streets to protests against austerity measures.
Alongside its banking woes, Spain is in the grip of a double-dip recession, and several of its regions are likely to seek central government support to avoid going bankrupt.
An ill-timed deal: History of BA's merger with Iberia
October 1998 BA first takes stake in Iberia.
Summer 2007 BA headed bid for Iberia fails.
June 2009 Spain's recession starts.
November 2009 BA and Iberia outline merger, which is nearly scuppered by BA pension deficit.
January 2010 Spain exits recession but unemployment passes 20 per cent.
February 2010 Iberia posts €274m 2009 loss.
October 2010 Iberia posts nine-month profit.
November 2010 BA's Willie Walsh and Iberia's Antonio Vazquez seal the $8bn merger.
January 2012 Spain back in recession.
April 2012 Iberia posts €98m loss for 2011.
August 2012 Prime minister Mariano Rajoy hints at bailout.Reuse content