The Spanish government said Wednesday it will decide within the next few weeks whether to ask for outside financial help, noting it might opt for a precautionary line of credit instead of bailout cash.
Spain is under pressure to tap a eurozone financial aid system that would give the European Central Bank the green light to buy the country's government bonds. That would lower Spain's borrowing rates in bond markets, relieving its financial burden.
A spokeswoman for the Spanish economy ministry, said the government was also still considering not asking for any aid at all, not even a credit line. She was speaking on condition of anonymity in keeping with ministry policy.
But credit rating agency Standard & Poor's on Wednesday delivered Spain another blow when it downgraded the creditworthiness of five indebted Spanish regions by one and two notches. They were Andalucia, Galicia, Madrid, Aragon and the Canary Islands.
The step came after the agency last week cut its rating on Spain's debt by two notches to BBB-, just a step above junk status, or non-investment grade. By indicating that it's a riskier asset to hold, S&P's downgrade may make it more expensive for the Spanish government to borrow money as it could spook bond investors.
The country's financial problems did not stem from government overspending, as in Greece's case, but from huge losses that its banks incurred after a property sector crash. Regional governments are also heavily in debt and need help from the central government in Madrid.
Issue to dominate EU summit
The issue of Spain's financial needs is likely to dominate a summit of the 27 leaders of the European Union on Thursday and Friday.
Germany has said Spain does not need a bailout and Prime Minister Mariano Rajoy may be reluctant to accept a rescue ahead of regional elections this Sunday. But analysts say that if Spain delays the request too long, investors may grow jaded and sell off its bonds again.
A 'bad bank' being set up to allow lenders to offload toxic real estate investments will hold up to €90 billion of assets, the Economy Ministry said Wednesday. The government aims to set up the bank, to be known by its Spanish acronym SAREB, on Nov. 19, the ministry said.
Establishing a bad bank is a requirement for Spain to gain access to a €100 billion loan by the eurozone group of nations to help those of its financial entities worst hit by the collapse of the country's bloated real estate sector with the onset of the crisis in 2008.
Rising speculation that Madrid will ask for help soon eased pressure in the bond markets Wednesday.
The interest rate on the country's benchmark 10-year bond was down 0.22 percentage points to 5.55 per cent in midday trading. It has hovered close to six per cent in recent weeks amid uncertainty over whether Spain would apply for aid or not.
The market improvement was also partly due to relief that Moody's rating agency did not cut its credit grade on the country to junk status, as had been widely feared in recent weeks. Instead, Moody's said after the European market close on Tuesday that it was keeping its Baa3 rating on Spain, the lowest investment grade.
Spain is at the core of Europe's financial crisis because, as the fourth largest economy in the 17-country eurozone, it would be hugely expensive to rescue should it lose access to bond markets.
The economy is also in terrible shape — it is in its second recession in three years, unemployment is near 25 per cent and forecasts for the coming year are grim.