European powers are "ready to act" if Spain seeks a sovereign bailout, a top official said, as financial markets banked on Madrid crying out for help within days.
As signs gathered that the eurozone's fourth biggest economy was entering the endgame before a rescue, the European Union economics chief, Olli Rehn, said Brussels was ready to help.
"The European Commission stands ready to act in case there is a request," Rehn told a news conference on Monday after a Madrid meeting with Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos.
"There is no request from Spain."
But "we have the necessary instruments at our disposal in case there would be a request from any member state of the euro area," he said.
In the past week, Spain has unveiled an austerity budget for 2013 and revealed a lower-than-expected price tag for saving its banking system, both items considered essential homework before a full bailout.
Rising expectations of a Spanish bailout will be on the minds of eurozone finance ministers at a meeting on October 8 and again for a European Union (EU) summit October 18-19.
"The Spanish authorities are in the driving seat," Rehn said, urging Spain to pursue efforts to repair its deficit-laden finances and enact structural reforms.
"The choices will only get harder if they are postponed," he cautioned in a joint news conference with De Guindos.
The Spanish 2013 budget, presented to parliament on Saturday, contained 39 billion euros ($48.48 billion) in austerity measures, but was widely seen as being overly optimistic by tipping only a 0.5-per cent economic contraction.
The right-leaning Popular Party government at the same time revealed a broad range of reforms, including freeing up the market for goods and services.
But as the government took an axe to most spending, it envisaged a one-per cent in increase in old-age pensions next year, meeting a key pre-election promise.
"In order to restore the sustainability of the public finances, it is necessary to ensure sustainability of the pensions system," Rehn warned. "It is a key challenge for Spain."
Spain's government on Friday released an audit of its 14 major banking groups, half of which failed a severe stress test showing they would need some 59 billion euros in new capital.
The government has already struck a deal with its eurozone partners for a rescue loan of up to 100 billion euros for the banks.
But Madrid says it will probably need only about 40 billion euros from the eurozone loan because the lenders can find much of the cash elsewhere, including by selling assets.
On Saturday, the government revealed that the cost of the banking rescue will send its debt soaring to 85.3 per cent of gross domestic product in 2012 and 90.5 per cent next year.
That news further raised concerns that Moody's Investors Service could downgrade Spain's sovereign debt rating to junk bond status when it finalises a review in the next few days.
"That would make it more difficult for Spain to finance itself on the markets and, we believe, would accelerate the request for a bailout," brokerage Link Securities said in a report.
If Moody's cuts Spain's debt to junk bond status it would be "almost impossible" for the country to delay any further a request for a sovereign bailout, the brokerage said.
"The solution, in a few days," it concluded.
Moody's issued a report on Monday warning that Spain may have underestimated the price of the banking bailout.
The audit result was far below its own estimates for Spanish banks' capital needs of 70-105 billion euros in a stress test, the New York-based credit rating agency said.
"If market participants are sceptical about the stress test, negative sentiment could undercut the government's efforts to fully restore confidence in the solvency of Spanish banks," it said.
Spain's task is complicated by the grim economic backdrop.
The Bank of Spain said last week the recession, which has left one in four Spanish workers unemployed, deepened in the third quarter.
Spain's budget contained spending cuts that were "tough and real" despite anti-austerity street protests, and independence stirrings in the powerful but debt-struck northeastern region of Catalonia, said Holger Schmieding, analyst at Germany's Berenberg Bank.
"In our view, they are actually too tough. A fifth austerity package within 10 months is a bit much for a country that is already in recession," the economist said in a report.
The analyst noted pressure from Germany for Spain to pick up the tab for its own banking rescue even after a joint eurozone banking supervision regime is established.
"This has made it even more likely that Spain will request support within the next two weeks," Schmieding said.