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Will Spain Finally Give Markets What They Want?

Friday, 19 Oct 2012 | 2:32 AM ET

Will they or won't they?

Andres Valdaliso Martinez | Flickr Open | Getty Images

That's the big question markets have been asking about Spain for the past few weeks—whether the country will ask for a credit line from Europe's rescue fund and trigger a bond-buying program by the European Central Bank (ECB).

Now, after weeks of dithering, Spain's Prime Minister Mariano Rajoy may have to bite the bullet as Moody's Investors Services this week removed a major uncertainty hanging over Spanish debt by affirming the country's investment-grade credit rating, paving the way for Spain to request financial aid.

"The big uncertainty was Moody's and that's gone. Spain at this point has no choice but to ask for a bailout," Kathy Lien, managing director of KB Asset Management in New York, told CNBC Asia's "Squawk Box" on Friday.

For weeks, Rajoy has been keeping markets on edge by shying away from asking for financial help, sending Spanish bond yields to almost 7 percent in early September even as he denies that the nation even needs any aid.

Despite the rhetoric, Spain has been ready to seek a credit line since the beginning of October, according to Reuters, but the request has been delayed due to German reluctance to sign off on the accord. This tussle between Spain and Germany has been what's keeping Rajoy from seeking help. (Read more: Spain Ready for Bailout But Germany Hesitates)

This uncertainty over Spain's finances – and the inability of the zone to trigger the bond buying – has weighed on the region.

In recent days, however, Spain appears to be reconsidering its position. Just earlier this week, a senior Spanish Financial Ministry official said the country is considering a request for a line of credit from Europe but not until it sees terms from the ECB, the clearest indication so far of how Rajoy's government plans to proceed. Germany has also softened its stance towards its debt-laden European peers, with two senior lawmakers saying the country is open to Spain seeking a precautionary credit line from Europe's rescue fund.

"Spain wants the ECB to lay out the terms first before it makes a decision and that tells you that they are not co-operating as much as you would like but at least they are willing to listen. They are open to the idea," BK Asset's Lien said.

Growing pressure from investors and many European counterparts on both Spain and Germany over the past few weeks have made Spanish request inevitable, analysts say.

All these developments have appeared to soothe investors' nerves and allowed Spain to sell more bonds than it had intended at its latest bond auction on Thursday. The yield on the 10-year note fell to 5.46 percent at the auction, the lowest level since January.

However, the timing of the request by Spain is still unclear. It won't be as early as this week at the EU leaders' two-day summit that started Thursday, analysts say. (Read more: Merkel, Hollande Clash on EU Budget Tsar Before Summit)

Still, markets will be seeking reassurances that Spain is seriously considering asking for a bailout, and that Europe is committed to providing support to the nation, as well as other peripheral states such as Greece, said Michael Woolfolk, Managing Director and Senior Currency Strategist with BNY Mellon in New York.

"I think what we are getting from EU officials is more of the same; nonetheless, it's what the market wants to hear right now amidst concerns that perhaps Spain was considering not to reach out for a bailout package or perhaps an outside chance of a Greek exit," Woolfolk said. (Read more: Cost of Four Euro Exits? $22 Trillion: Study)

According to Slim Feriani, CEO and CIO of Advance Emerging Capital, a fund manager based in London, until Germany gives in and does not insist upon overly stringent terms, a deal is unlikely.

"The buck stops with Germany. They are the ones who can say, just write a check," Feriani told CNBC. "(A bailout) is what the markets want. We think they should give what the markets want at this stage. Spain going down that path would be perceived as positive."

By CNBC's Jean Chua.

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