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Spanish bailout dilemma sharpens

Associated Press Modified: October 11, 2012 at 10:16 am •  Published: October 11, 2012

"Not easy to raise that kind of money with that kind of rating when the economic data is likely to come in worse than government forecasts," said Swordfish's Jenkins.

Like many other countries in Europe, Spain is living way beyond its means. Its budget deficit is running at a little over 6 percent of gross domestic product, double the amount allowed by EU rules.

That is adding to Spain's public debt burden, which the government forecasts will rise to 80 percent of GDP this year from 69 percent last year. It projects it hitting 90 percent next.

Households are also struggling financially amid high unemployment and the implosion of a property bubble.

Earlier this week, the International Monetary Fund forecast that the Spanish economy would contract 1.3 percent next year, more than double the Spanish government's own prediction.

Rajoy on Wednesday said the country was making important reforms and that those, combined with Europe's efforts to increase economic integration, would prove the IMF wrong.

"If we follow that strategy ... we'll see that the reality turns out to be better than the forecasts," Rajoy said.

The prevailing view in the markets remains that Spain will have to request outside help, possibly after regional elections later this year, given the scale of the task in hand.

"With a large proportion of their funding for the year already completed we expect them to have sufficient funds to hold out until regional elections are out of the way later this year," said Elisabeth Afseth, an analyst at Investec.

She noted that Spain's bond redemption payments at the end of January may be uncomfortably costly if it does not tap the European financial aid program.

Christine Lagarde, the head of the IMF, this week voiced her concerns at the impact Europe's austerity drive was having on economic growth, both in the continent and globally. The IMF downgraded its global growth estimates for this year and next.

Spain, alongside many other European countries, has slashed spending and raised taxes to get a handle on its debts and to regain investors' confidence in its public finances.


Pylas reported from London.