Spain's new government may rush through emergency measures immediately after Sunday's parliamentary election, but unless the euro zone finds a durable systemic solution to its debt crisis, Madrid will still be forced to seek a financial rescue.
The center-right People's Party, led by Mariano Rajoy, is expected to sweep to victory with a strong parliamentary majority on Sunday, giving it a solid mandate to deepen painful spending cuts and economic reforms.
While the new administration will not be sworn in until mid-December, analysts say Rajoy should be able to team up with incumbent Socialist Prime Minister Jose Luis Rodriguez Zapatero to announce contingency policies given the depth of the crisis.
Zapatero has cut costs and forced through economic reforms for more than a year -- guaranteeing his party a loss at the polls -- but investors have continued to dump Spanish debt regardless and borrowing costs are near-unaffordable.
Meanwhile, contagion from the euro zone debt crisis has spread to Italy and France, the currency area's third and second largest economies, making Spain's problems a small part of the wider problem.
It depends on Italy, not on us. To ask about Spain doesn't make a great deal of sense as the problem is out of our hands. It transcends to a much higher level, Madrid-based financial analyst Juan Ignacio Crespo said.
Spain's Treasury paid the highest rate since 1997 to sell a new 10-year bond on Thursday, just shy of the 7 percent level that forced Greece, Portugal and Ireland to apply for bail-outs.
At current financing costs, Spain would need a primary surplus of 1.8 percent to keep its ratio of debt to gross domestic product stable in the long term, according to calculations by Reuters Breakingviews. The country is forecast to run a primary deficit of 3.5 percent next year and its poor growth prospects mean it faces a struggle to get close to rubbing that out even years down the road.
NO WAY OUT
Italian Prime Minister Mario Monti, a technocrat who replaced former PM Silvio Berlusconi, said on Thursday that Italy faced a serious emergency which could help decide the future of the European Union.
Paris also paid markedly higher yields in a debt sale on Thursday and will soon be forced to show it is willing to make politically sensitive measures to defend its shaky AAA investment grade debt rating.
You get to the point where even the countries doing the right thing, showing progress on structural reforms and fiscal deficits, cannot get any traction with the markets because the market is closed to the periphery in general, Deutsche Bank economist Gilles Moec said.
That the governments do their bit is a pre-requisite, because it's what warrants support from the other Europeans and the ECB. But it isn't sufficient.
Zapatero reversed his previous economic stimulus policy at the beginning of 2010 with spending cuts worth around 5 percent of GDP in an effort to bring down one of the euro zone's highest public deficits.
By doing its homework, Spain staved off the immediate need for a bailout -- the size of which would test EU political will and the capacity of the economic safety net, the European Financial Stability Facility, or EFSF.
But it's increasingly clear it has been too little, too late, much to the frustration of Spaniards who are likely to suffer even deeper cost cutting under Rajoy.
Spain is like a patient in the hospital. We're anxious they get back to work, but they need a period of recuperation first, economist at the Spanish business school IESE Antonio Argandona said.
Rajoy will inherit a very troubled economy, which as elsewhere calls into question whether the strategy of eye-watering austerity leaves any chance of the growth needed to pay off the country's debts.
Spanish unemployment is more than double the EU average at 21.5 percent, with almost half of young people out of work. The economy stagnated in the third quarter and is widely expected to slip into recession by the end of the year.
Burdened by resulting low revenues, analysts polled by Reuters expect the government to miss the public deficit target of 6 percent of gross domestic product this year by a wide margin.
While Rajoy will likely scramble next week to prove his resolve to nervous investors, all efforts will be met with cautions skepticism perhaps forcing him to face the nuclear option Zapatero avoided, an appeal to Brussels and to the International Monetary Fund.
The only emergency measure left is to apply for an EFSF/IMF credit line. It would be horrible for Rajoy to have to do that as a first step, but Zapatero would not stand in his way, said Antonio Barroso, political analyst at Eurasia Group.
(Edited by Fiona Ortiz and Patrick Graham)