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Is Spain Stumbling Towards a Full Bailout?

The will-they won’t-they saga of Spain and the troika which has bailed out other struggling euro zone economies tipped the scales in favor of “they will” at the weekend.

Spain Economic Crisis
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Spain Economic Crisis

Spain seems to be stumbling towards a full bailout, and its politicians appear to be gently prodding it along.

Prime Minister Mariano Rajoy admitted on Friday that he is considering bailout options, as Spain's economic situation appeared to be worsening. The usually taciturn politician has now given two recent press conferences – and has not ruled out seeking troika assistance in either.

Finance Minister Luis de Guindos said in an interview published Sunday in Spanish daily newspaper ABC: “When we know the details [of the aid program], we'll have a more precise calendar.”

De Guindos used to head up Lehman Brothers’ Spanish operations. Hopefully Spain’s economy won’t provide the next Lehman moment on his watch – but the chance is still there.

“It’s still very speculative to think that things have in any way improved. We’ve not seen significant investment flows into the periphery,” Peter Chatwell, interest rate strategist, Crédit Agricole, told CNBC Monday.

“Credit rating still makes it very difficult for the institutional investor to participate in those markets.”

Spain’s government has yet to convince the markets that it can meet its financial targets for 2012.

A lot will depend on measures which are being brought in in the last six months of the year, such as increases in indirect taxes and the suspension of civil servants’ December bonus payment.

“Risks remain tilted towards fiscal slippages for regions and social security,”Antonio Garcia Pascual, chief Southern European economist at Barclays Capital, wrote in a research note.

There is also the specter of political protest. While Rajoy’s government, with its majority, is in many ways stronger than the coalition ruling Greece, for example, there are still plenty of dissenting voices. Madrid and Barcelona, don’t forget, are where Los Indignados – the movement which inspired the Occupy protestors – began their protests.

One politician’s response to cuts to unemployment benefits was to say of the unemployed – now close to a quarter of Spain’s working-age population - “Que se jodan!” or “Screw them!” This rather Marie Antoinette-ish remark has now cropped on graffiti daubed on banks and posters of politicians, as well as posters during recent protests.

Yields for shorter-term bonds could improve and attract more investment if there was a clearer signal from the Spanish government, Chatwell said. Yields on two-year Spanish debt fell by almost 90 basis points on Friday after Rajoy’s words. This could buy the government more time – yield spikes in countries like Ireland and Greece helped prompt their bailouts.

The need for more clarity on the European Central Bank’s plans could delay any final decision for a while. Uncertainty could send the euro down against the dollar again, after it rallied at the end of last week. And the fog of indecision will continue to cloud the path ahead for Spain.

Written by Catherine Boyle, CNBC.com. Twitter: @catboyle01.

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