Spain has started working with European Union officials on a potential bailout, according to a report in the Financial Times today, but if it goes ahead it will be a different beast to the three post-crisis bailouts already announced.
Spain’s sheer size means that its combined gross domestic product is bigger than all the previously bailed-out nations: Ireland, Portugal, and Greece.
The source of its pain is also different to the sovereign debt problems of Greece. Spain’s ratio of debt to gross domestic product is lower than Germany's, and it has been narrowing its current account deficit. (Read More: Spain's 'Surreal' Situation)
The euro zone crisis itself is in a different phase, after the announcement of the European Central Bank (ECB)’s new bond-buying program, and Spain has made more progress along the reform route than many believe, according to Chris Watling, chief executive of Longview Economics.
“You wouldn’t have thought so from news-flow, but actually they’re quite advanced,” he told CNBC Europe’s “Squawk Box.”
The results of Spain’s financial sector review by auditor Oliver Wyman will be announced next Friday. The government is also preparing a new budget for 2013, to be announced next week, which the EU is believed to be helping shape ahead of a bailout announcement. Speculation about what both will contain has already increased.
“I think the crisis is largely contended with. The mechanisms are in place to solve it,” Watling said. “They’re discussing a deal behind closed doors anyway and I think Spain would be mad not to put something in place.”
Timing now seems to be the real issue with the bailout.
“The idea seems to be to make sure that the Spanish government can itself announce the measures that are necessary for European authorities to recommend a pre-cautionary programme, avoiding the humiliation of being told what to do,” according to analysts at RBC.
There’s “not much further to go” according to Philip Tyson, rates strategist at Icap, who advised investors to stay in safe-haven bonds until more news comes out of Spain. Tyson argued that there would probably need to be another rise in yields to get Spain to the negotiating table.
If this is true, the bailout announcement may not be imminent. Thursday’s auction of Spanish debt saw lower borrowing costs than anticipated, fuelled by the expectation that the ECB will step in to keep Spanish yields at manageable levels. (Read More: ECB's Bond-Buying Plans)
Francisco Gonzalez, chairman of BBVA, predicted on Thursday that Spanish banks will need 70 billion to 80 billion euros ($91 billion to $104 billion) to plug a capital shortfall, much higher than the 51 billion to 62 billion euros ($66 billion to $80 billion) estimate that Oliver Wyman made in June and IMF forecasts of around 40 billion euros ($52 billion).
The government is already considering plans to freeze pensions and raise the retirement age sooner than planned, according to Reuters. Bailed-out countries like Ireland and Greece had to change their pensions system as a result of their bailouts. Rajoy, whose party has a high level of support amongst pensioners, had voted against raising the retirement age while in opposition.
—By CNBC’s Catherine Boyle; Follow Her on Twitter @catboyle01