Spain's borrowing costs rose further Tuesday, heaping pressure on the government to seek outside help amid growing doubts that it can cover its debt without an international bailout.
"What is at stake here is to avoid an imminent financial collapse," the Economista daily said, reporting that the government was considering a partial rescue which would get it through to the end of the year.
Analysts said the country had enough funds to last several months but with the markets turning against Madrid, something has to be done -- either a bailout or getting the European Central Bank to intervene directly to force its borrowing costs down.
The Economista, citing unnamed sources, said Spain wanted a line of credit to cover 28 billion euros ($34 billion) in debt maturing in October even as the Treasury paid higher rates Tuesday to raise 3.05 billion euros ($3.72 billion).
The Treasury sold 3-month bills at 2.434 percent, up from 2.362 percent at the last similar auction in late June, with 6-month bills rising even more sharply, to 3.691 percent from 3.237 percent.
Spain's long-term borrowing costs have soared in recent days to well above the danger line of 7.0 percent, hitting levels that forced Greece, Ireland and Portugal to seek EU-IMF bailouts.
The yield or rate of return on the benchmark 10-year Spanish government bond was higher again Tuesday, at 7.585 percent, while the Madrid bourse slumped nearly 2.9 percent in early afternoon trade.
At such high rates, "it is impossible to raise funds" on the market, with Madrid only able to hold out for another two months, said Daniel Pingarron at IG Markets.
"Spain currently has about 30 billion euros ... with that, it can cover debt due in July, in August and perhaps in September but in October there is a very large sum due," Pingarron said.
Analysts said that with the central government's finances so strained, news over the weekend that some of the country's 17 regions were looking for help from Madrid was enough to tip the tables against Spain on the markets.
"It is clear that the situation is unsustainable (and) that the government cannot hold out much longer, with October looking like the deadline," said Alberto Roldan at Inversis brokerage.
Spain is struggling to resolve two interlinked problems which feed off each other -- a banking sector laid low by the collapse of a property bubble in 2008 and reining in spending to put the public finances in order.
Last week, the EU agreed on a bank rescue plan of up to 100 billion euros but this was then more offset after news that the Valencia regional government was asking Madrid for direct help.
Reports that other regions -- including key Catalonia -- would do the same spooked investors even more badly, said Cyril Regnat at French investment bank Nataxis.
"The position of the regions, which appeared under control at the beginning of the year, has clearly deteriorated (and) of the 17, about six will ask for help" from the central government," Regnat said.
"In all, you have the regional and banking problems compounding the problems of the state and that explains the particularly violent reaction on the bond markets," he added.
Analysts say that to avoid disaster, Spain needs the European Central Bank to step in quickly and buy up Spanish government bonds so as to bring down its borrowing costs.
The ECB has done this before but has been absent from the bond markets for some time and it is not clear if it is ready to step in again now without clear backing from the major eurozone states, especially Germany.
Germany, where opposition to further bailouts runs strong, may have been chastened Tuesday after Moody's cut the country's ratings outlook to 'negative' from 'stable,' putting it at risk of losing its prized triple-A status.
Spain "has no chance of restoring its credibility with the markets on its own," Pingarron said, especially given its dire economic prospects of continued recession next year.