The head of Spain’s central bank warned the government Thursday the growth and revenue forecasts in its budget are too optimistic.
Luis Linde told the Spanish parliament "the most urgent problem faced by the Spanish economy is recovering the confidence of the markets."
He said the government should consider doing more in order to meet its promise to the European Union to keep its budget deficit next year to 4.5 per cent of gross domestic product.
The government’s moves to raise taxes and make billion of euros in spending cuts have already prompted three nights of protests in Madrid and elsewhere last week.
Also Thursday, European Central Bank President Mario Draghi nudged Spain and its European partners to take up bank's offer of help with its borrowing costs, reassuring the country that the conditions it would need to meet to get assistance "don't need to be punitive."
Draghi however, said it was up to Spain to decide whether to seek help.
The ECB chief said at an ECB news conference in Brdo Pri Kranju, Slovenia, that "significant progress has taken place" in Spain, adding that a number of measures had been "announced, legislated, and implemented" in only a short period of time.
Spain’s cost of borrowing fell Thursday as investors anticipated a rescue package, with the government auctioning off two-year bonds at 3.282 per cent, compared with a rate of 5.204 per cent during a similar sale in July.
The ECB has promised to keep borrowing costs manageable by buying Spain’s short-term bonds, but to get that help, it must first ask for assistance from the rest of the eurozone by approaching the bloc's emergency fund, the European Stability Mechanism, and agree to tight spending and reform measures.
Spain is widely expected to ask for a bailout by the end of the year, but a delay could make markets nervous and push up its borrowing costs.
Spain's Prime Minister Mariano Rajoy is holding off asking for help out of concern that Spain may be slapped with harsh austerity conditions from the eurozone.
The ECB also left its key interest rate for the 17 countries that use the euro unchanged at a record low 0.75 per cent, underscoring the bank's message that it had taken steps to rescue the euro from collapse — and that now it's up to governments to act.
At its last policy meeting on September 6, the ECB said it would buy unlimited amounts of government bonds to help lower borrowing costs for countries such as Spain or Italy, which are struggling to manage their debts.
European governments have already had to bail out three countries — Greece, Ireland and Portugal — when they could no longer borrow at affordable costs and keep servicing their debts.
Cyprus has also asked for a bailout and Spain has received a commitment of up to €100 billion to repair its shaky banks which suffered heavy losses on real estate loans.