A widening fiscal gap and mounting pressure from the business community and credit ratings agencies leave Spain with little or no choice but to request European aid soon despite saying it is in no rush to make a decision, analysts and sources say.
Prime Minister Mariano Rajoy has said his government is studying strings attached to a new European Central Bank plan to bring down Madrid's borrowing costs if it seeks assistance from the euro zone's rescue fund. Rajoy said in a television interview on Monday he still had not made up his mind.
But a combination of budget slippage, welfare costs inflated by recession and overspending by Spain's autonomous regions mean the government now needs to borrow 30 billion - 45 billion euros (24 billion - 36 billion pounds) in medium- and long-term paper rather than the planned 20 billion by the end of the year.
Spain, which after Greece, Ireland and Portugal has become the latest focus of a euro zone debt crisis now nearly three years old, says it can afford to take its time.
The Treasury has issued 66 billion euros, or 76.8 percent, of its original medium- and long-term funding plan of 86 billion euros for 2012.
It has also secured European rescue funds of up to 100 billion euros for its troubled banks and plans to use bank loans and the national lottery to fund an 18-billion-euro liquidity mechanism for its highly indebted regions.
The risk that financial strife in the banks and regions spills over to the central government have been at the heart of investor concerns over Spain.
Although yields on Spain's benchmark 10-year bond reached record highs in July, the country's average debt servicing cost is lower than in previous years at 4.7 percent for long-term maturities, compared to a forecast of 6.4 percent in the 2012 budget.
This, however, is only one small part of the equation and market pressure could quickly prove unsustainable, forcing Madrid to accelerate the aid request.
The Treasury has little flexibility between now and the end of the year as it must refinance 27.5 billion euros of debt coming due in October.
Credit rating agency Moody's, which has Spain's sovereign debt rated just one notch above junk grade, is due to release its next review by the end of September. Moody's and Standard and Poor's both said last month an aid request would be favourable for the country's ratings, a clear signal that they would downgrade Spain if it failed to make an application.
Business leaders, wary that a sovereign downgrade to junk would trigger further ratings cuts for Spain's top companies, which are already struggling to cut mountains of debt, are pressing the government to move forward with the request.
"(A downgrade) would be devastating for companies and that's perhaps the biggest concern now for the government," said one Spanish official, speaking on condition of anonymity.
Arturo Fernandez, a leader of the CEOE business association said last week time was running out, although some executives of big Spanish multinationals fear the stigma of an aid request.
The Treasury is rapidly losing firepower as its liquidity buffer diminished to 23 billion euros in July from 40 billion euros in May, according to data from the Bank of Spain.
Analysts from Banesto believe it fell further in August to reach a worrying 12 billion euros, in line with the estimate of another senior analyst, Nick Kotsonis, who put the buffer at 13 billion euros.
"I think it is a done deal that Spain will seek assistance. They didn't raise nearly enough money in the markets in August and in fact I would argue that they are not even trying to avoid assistance at this point," said Kotsonis, senior fixed income analyst at the Ohio Public Employees Retirement System.
Banesto said it was "only a matter of time" before Spain made a request.
Perhaps even more worrying is the fiscal gap Spain is set to register at the end of the year despite 14 billion euros of fresh spending cuts and tax hikes for 2012 announced in July.
A higher-than-expected rise in consumer prices will cost an extra 4 billion euros for a one-time inflation adjustment to state pensions. Spending on unemployment benefits increased by 5 percent this year when the government had expected them to fall by 5 percent, creating another 3-billion-euro budget hole.
And a tax amnesty meant to raise 2.5 billion euros by November had only attracted 50 million euros at the end of July, according to budget ministry figures.
The gap could widen more as further slippages -- 1 billion euros for every decimal point in the deficit -- are likely to materialise after Spain reported a central government deficit of 4.6 percent of GDP from January to July, already above the 4.5 percent full-year target.
The government says the central government deficit will fall in coming months, leaving it on track to meet the objective, as the figure takes into account transfers to indebted regions which are also a major source of concern for financial markets as their fiscal performance remains unclear.
Jose Ignacio Conde-Ruiz, economist and deputy director of the FEDEA think-tank in Madrid, sees the autonomous regions overshooting their joint deficit target of 1.5 percent of GDP and reaching 2.2 percent under his most optimistic scenario.
A source familiar with government thinking said the overall public deficit could go as high as 8 percent of GDP, creating an additional funding shortfall of about 15 billion euros.
Adding up all the elements of the funding gap, the final funding figure in medium- and long-term paper which would have to be issued by the end of the year comes to 30 billion euros -- or 45 billion if the deficit climbs to 8 percent -- rather than the 20 billion euros under the current programme.
An economy ministry spokeswoman said the Treasury would stick to its funding programme, which will enable Spain to meet its financial obligations until the end of the year. "New measures have been taken in July and we believe that there is no need to alter our programme to meet our obligations," she said.
Spain could issue more short-term paper to take advantage of improved funding conditions after the ECB bond-buying plan was announced last week, but its issuance calendar on short-term maturities already looks busy, with 35 billion euros still to come in 2012.
An emphasis on shorter-dated debt would also store up future problems as it would add to an already very challenging funding program over the next three year, with debt repayments of 122 billion euros due in 2013, 83 billion euros in 2014 and 70 billion euros in 2015, well above the 57 billion euros Spain faced in 2012.
(Additional reporting by Andres Gonzalez; Editing by Fiona Ortiz/Paul Taylor)