Facing a large mount of bond rollovers and ever-increasing pressure from European leaders, Spain is expected to seek a full bailout in the next few weeks, experts have told Xinhua.
"I believe it most likely that these will only be sold at sensible prices if there is a request for aid," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics, referring to the 25 to 30 billion euros (about 33 to 39 billion U.S. dollars) in bond rollovers Spain faces in October.
The yields of Spanish bonds have tumbled in recent weeks as some foreign investors have started buying in anticipation of the European Central Bank (ECB) purchasing bonds under a newly-agreed support mechanism.
The ECB unveiled earlier this month that it could potentially buy an unlimited amount of eurozone sovereign debt with maturities of between one and three years, using its newly-deployed Outright Markets Transactions (OMT).
"The Spanish government is going to make an application for precisely the kind of support that was made possible by the ECB , and I believe they will do so before the next European Council meeting which is in mid-October," Kirkegaard said.
Spanish Prime Minister Mariano Rajoy would also be under pressure from other European leaders to make use of the new support options.
"Or put another way, the ECB would not have proposed these new measures without a fairly high chance that they would be used," he added.
DITHERING, BUT NOT FOR LONG
Under pressure, the Spanish government seems to be dithering, as taking a full bailout would probably force the country to submit its fiscal policy to external orders and lead to more austerity in an economy already in recession and with high unemployment.
However, Kirkegaard said he "did not regard the issue of conditionality as being a big issue."
"Spain has already implemented pretty much all the austerity they need to in the coming years," he stated.
This means that "any additional conditionality would be covering longer-term structural reform issues over which agreement can be found relatively easily and which would not damage Rajoy's domestic political status much more than his erratic crisis response already has," Kirkegaard added.
Zsolt Darvas, a research fellow at the Brussels-based think tank Bruegel, said politicians were understandably reluctant to apply for a full bailout, but that Spain's borrowing costs would again become unsustainable if it did not request such a programme soon.
"The economic outlook of Spain is very weak, there is still uncertainty about eventual banking losses, and the public finance situation of regional governments may bring further surprises," Darvas told Xinhua.
"In principle it could survive a couple of months, but that would just prolong the uncertainty and worsen the fiscal outlook, since borrowing from the market is still much more expensive than official financial assistance would be," he added.
Kirkegaard regards the imminent Spanish application for a bailout as a good thing for Europe.
"It answers the question about 'what to do about Spain/Italy?' in a way that is both financially credible (via potentially unlimited ECB support) and politically sustainable (via conditionality and German support)," Kirkegaard said.
"This removes a very significant amount of tail-risk from the euro area and will aid the continent in exiting the crisis," he added.
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