"Somebody has to bet on the euro and now, given the architecture of Europe isn't changed—who can make this bet but the ECB," Spain's Foreign Minister José Manuel García Margallo said Saturday.
The ECB so far has bought around €214 billion ($260 billion) of government debt with its Securities Market Program, but hasn't actively used this tool for months. In the interim, Spain has had to pay dearly to continue attracting investors to its bond auctions.
ECB President Mario Draghi said in an interview published Saturday that the central bank won't necessarily step up to provide financial aid for struggling governments like Spain. "Our mandate isn't to solve the financial problems of states, but to ensure price stability and contribute to the stability of the financial system quite independently," Mr. Draghi was quoted as saying in an interview published in French daily Le Monde.
Concerns that Spain won't be able to meet its funding needs helped spark a global selloff in financial markets Friday, as the government warned the country's economic contraction would drag into next year, and one of its most indebted regional administrations asked the central government for help refinancing its debt.
The market slump underscored fears that Spain's finances are spiraling out of control and could require the country to seek a full rescue from the European Union.
Euro-zone finance ministers provided relief for Spain's beleaguered banking sector on Friday, signing off on a bailout loan of as much as €100 billion for troubled banks, with about €30 billion available immediately in case of urgent financing needs. But the agreement stipulates that Spain ultimately would be on the hook for the aid, dashing Madrid's hopes that the deal would help break the link between sovereign and bank debt. EU finance ministers also stressed that Spain needs to radically overhaul its financial sector and implement tough austerity measures.
Amid the renewed worries about the health of the euro zone's fourth-largest economy, Spain's benchmark stock index dropped 5.8%, the most in a day since May 2010.
The country's long-suffering government bonds were pummeled, driving yields to 7.22%.
The pain was shared with Italy—the next-most-worrisome country for investors. Italian bond yields also shot up, and the stock market slumped 4.4%. The euro depreciated against the dollar and was trading at $1.2158 late Friday in New York. Equities were lower across most of the Continent, and investors flocked to the safe embrace of German government debt: The yield on the 10-year Bund slid to 1.17%, near record lows.
Madrid sharply lowered its economic forecasts for the next several years. Budget Minister Cristobal Montoro said Spain's gross domestic product now is likely to contract around 0.5% in 2013, compared with a forecast of 0.2% growth given earlier this year.
The government also cut its forecast growth rate for 2014 to 1.2% from a previous 1.4%. However, it upgraded this year's forecast to a contraction of 1.5% compared with a previous estimate of a 1.7% contraction, though Mr. Montoro gave few details explaining why.
Spain is striving to shrink its budget deficit to 2.8% of gross domestic product in 2014 from 8.9% last year. In that vein, Mr. Montoro said new 12% cuts in funding for central-government ministries will help Spain's government lower the spending ceiling—excluding interest payments and funding for social security—for next year by 6.6% from this year, to €73.3 billion.
"These steps are not negative, they simply seek to lower the deficit, because there is no alternative to lowering the deficit," Mr. Montoro said.
But many analysts worry that Spain's steady stream of austerity cuts is doing further harm to an already weakened economy. The cuts are making it impossible for government spending to offset private-sector demand that is lost as households and corporations face tax increases and try to reduce their indebtedness after a decade of aggressive borrowing.
Spending cuts are also proving deeply unpopular. Mass demonstrations took place in 80 cities across the country late Thursday, with the flagship protest in Madrid featuring a limited number of clashes with armored police as the night wore on.
On Saturday, the unemployed from around Spain joined public-sector workers such as teachers and doctors in central Madrid for demonstrations, banging drums, blowing whistles and waving signs with slogans such as "Your System, Our Crisis." The protests remained peaceful although police had blocked off major streets hours before the march began.
The austerity is also hitting Spain's regional governments, which control more than a third of all government spending, including health care and education, but have few taxation powers.
The government of Valencia, Spain's second-most-indebted region, which has been slammed by a five-year property slump, said Friday it intends to tap a fund with as much as €18 billion that Spain's central government launched this month for regional governments that are unable to refinance debt.
Other regional governments are struggling to raise cash. Murcia, in southeastern Spain, put six landmark buildings up for sale on Friday. It is planning to sell moorings for boats. "We're selling the things that are easy to trade first," a spokeswoman said. She added that it is also considering applying for central-government aid.
Some regional leaders were quick to say they were in the clear. Andreu Mas-Colell, Catalonia´s finance chief, said on state TV Saturday that they are far from needing a bailout, and "we hope not to see one ever." Leaders of regions Galicia and Extremadura also said they weren't planning to request aid.
In exchange for accessing the money, regions must agree to additional austerity commitments. The regional loan facility will be partially funded via the national lottery, which is taking out a loan for €6 billion against future income to help fill the fund.
The creation of the new fund addresses a request made by the regions, all of which run significant budget deficits and have been pressuring the central government to help them secure funding. These factors have further complicated the delicate balancing act the national government must perform between supporting its regions and protecting its own credit-worthiness.
The exact amount of the bailout Spanish banks will receive from its euro-zone partners will be calculated in September, after a detailed bank-by-bank assessment of capital needs that will also determine which Spanish financial institutions are viable and should be rescued.
International Monetary Fund Managing Director Christine Lagarde said "the implementation of these measures will contribute to significantly strengthen Spain's financial system, an essential step in restoring growth and prosperity in the country."
The Spanish bailout is the first one the IMF isn't co-financing alongside the euro zone, after the fund put cash into Greece, Ireland and Portugal.
The IMF will still have a role in Spain, monitoring and sending staff there for regular reviews.
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