With the economically vital tourist season coming to a close and the country sliding further into double-dip recession, Spain's dole queues looked set to get still longer over the coming months.
Increased unemployment benefit payments are already putting pressure on Rajoy's budget plans, with figures released on Tuesday showing a 5% increase for the first seven months of the year. The budget minister, Cristóbal Montoro, had predicted that benefit payments, which fall over time for the long-term unemployed, would actually come down by 5% this year.
The miscalculation may add several billion euros to the budget deficit, ramping up pressure on Rajoy as the recession hits tax income, borrowing costs soar and big-spending regional governments struggle to finance themselves and reduce their own deficits.
With the markets on tenterhooks ahead of Thursday's meeting of the ECB, the bad news from Spain compounded a decision by Moody's ratings agency to place the entire European Union on negative outlook, citing the mounting financial strain of the crisis on key countries like Germany, France and Britain. Britain's FTSE 100 closed down 1.5% at 5672.01 while Germany's DAX lost 1.2% to 6932.58 and France's CAC 40 dropped 1.6%. The Dow Jones industrial average on Wall Street dropped 0.6% as the key ISM manufacturing index showed the sector continuing to shrink last month.
Analysts increasingly believe that Spain, which has already been given up to €100bn of eurozone money to rescue its banks, will be forced into seeking a full bailout.
Jens Nordvig, a forex strategist at Nomura, said that capital flight from Spain was an indicator that the country was on the path to bailout. Some €98bn left in May and June alone.
"The scale of capital flight that took place over the last few months in Spain supports this view," Nordvig wrote in a note to clients quoted by CNBC, adding that capital flight from Spain was now worse than from Indonesia during the 1990s crisis in Asia.
Spanish banks will start tapping a €100bn bailout facility in coming weeks as they struggle to cope with a vast pile of toxic real estate assets left over from a property bubble that exploded four years ago.
Four Spanish banks, including the fourth biggest, BFA/Bankia have been part-nationalised after being overwhelmed by the bad loans they gave to real estate developers.
Bankia needed a further €4.5bn emergency injection of capital from Spain's state FROB rescue fund on Monday as it prepared itself for the eurozone bailout.
In the first half of this year alone the four nationalised banks increased the amount of toxic real estate assets on their books from €56bn to €71bn as loans continued to sour, according to a study of their accounts by El País newspaper.
Bankia admitted to some €3bn (or 10%) more in loans to developers than it did six months ago.
This was not because it had started lending again, but because these loans had only recently been reclassified at the former savings banks which came together to form Bankia.
Bankia and the other nationalised banks – CatalunyaBanc, NCG Banco/Novagalicia and Banco de Valencia – are due to offload their toxic real estate onto a new bad bank which will be set up by the end of November as part of the eurozone rescue deal.
The "bad bank" will have up to 15 years to sell them and try to make a profit.
Some €28bn worth of property has already been foreclosed by these banks, meaning that they now own it, with almost half of that building land in a country that already has some 600,000 unsold residential properties.
Rajoy will meet Germany's Angel Merkel in Madrid on Thursday, the same day that European Central Bank boss Mario Draghi is expected to reveal details of a plan to shore up Spanish and Italian bond prices.
Moody's credit rating agency is due to review Spain by the end of the month and could downgrade its debt to junk status, blocking it from markets.
guardian.co.uk © Guardian News and Media Limited 2010