Spain comfortable with waiting game on aid

* German political obstacles need time

* Rajoy seeks more clarity on ECB bond-buying goals

* Rajoy focused on banking union

By Fiona Ortiz

MADRID, Oct 11 (Reuters) - Spain is comfortable putting offan international aid request for weeks or even months as itwaits out German political obstacles and seeks greaterdefinition on the European Central Bank's bond-buying programme,analysts and sources say.

In the meantime, Spanish Prime Minister Mariano Rajoy isfocusing on measures such as intensifying labour market reforms,as well as pushing for a European banking union that would helprebuild confidence in Spain's tarnished banking sector.

Spain's borrowing costs spiked in July, the yield on thebenchmark 10-year bond jumped over an unsustainable 7 percent,but tumbled after ECB head Mario Draghi unveiled a bond-buyingscheme to lower Spanish borrowing costs.

Spain must first sign up for a European rescue plan totrigger the bond buying. Given its debt position, the Spanishgovernment still sees that step as inevitable but pressure haseased as investors are less willing to bet against Spain withthe ECB waiting in the wings.

Germany has sent Spain strong signals that it should holdoff because German Chancellor Angela Merkel is wary ofpresenting a fresh aid request to her parliament, euro zonesources say.

Sources familiar with Rajoy's thinking say he also wants theECB to indicate exactly what it will achieve with thebond-buying. Is the idea to avoid periodic volatility or todefine a reasonable level for the risk premium on Spanish debt?they ask.

"We will end up there, with ECB action, but the ECB is stilldesigning the instrument in more accurate terms," said a sourceclose to the government. "The markets understand that we havethe fire extinguisher. We'll see how it evolves in the comingweeks."

Turmoil over Greece, a fresh spike in Spanish yields or acredit rating downgrade to junk status for Spanish governmentbonds could accelerate the process, but for now Madrid iscomfortable taking it slow, the source said.

Spanish officials see more risks to moving ahead quicklywithout assured German backing, than in delaying a request.

Meanwhile, they think things are moving in the rightdirection. For example, criticism of Draghi's plan has died downafter strident objectives from European Central Bank GoverningCouncil Member Jens Weidmann, who heads the German Bundesbank.

"We think that the current period of vacillation might lastfor several months if events don't intervene," Alex White, aneconomist with JP Morgan in London, wrote in a research note.

White said he saw little on the horizon to change Germany'sdesire to avoid a Bundestag vote on Spain in the near-term.

Then there is Rajoy's personality to consider.

"Rajoy has infinite patience to put up with tension whereothers would break down," said a senior banker in Spain.

Although Rajoy has said he is studying conditions forseeking European aid, there is no mystery over what the EuropeanCommission would demand of Spain in terms of structural reformsan spending cuts.

Euro zone sources have said conditions are likely to belargely in line with measures the country has already taken,since Spain would not be applying for a full rescue programmethat would cover all of its financing needs.

The International Monetary Fund has sent a strong message toEuropean policymakers to focus on growth even as they try tocorrect deficits, a line Spain applauds.

With the economy in a deep recession and unemployment closeto 25 percent, Spanish officials point out that ECB interventionmight bring liquidity, but won't revive economic growth.

"With or without liquidity we have a growth problemglobally, that we must start discussing," said the source closeto the government.


Rajoy has concentrated on moving forward with banking union-- under which the ECB would supervise European banks and theregion would set up a deposit guarantee fund -- which he sees askey to improving Spanish banks' access to liquidity.

After meeting French President Francois Hollande onWednesday the two leaders called for rapid progress towardbanking union at a European leaders' summit nextweek. However, Germany and others do not expect agreement evenon cross-border supervision for a year or more.

Originally, Spain was pushing for the banking union becauseit would have allowed the ESM rescue fund to directlyrecapitalise Spanish banks, keeping the cost of a financialsector rescue off the country's public accounts.

However, Spain is less concerned about that impact now,since it estimates it will use only 40 billion euros of the 100billion euros of bank rescue funds lined up, equivalent to only4 points of gross domestic product.

Treasury Minister Cristobal Montoro calculated the deficitwould swell to 7.4 percent of GDP this year when taking the bankrescue into account, but he said the European Commission wouldnot consider that as non-compliance with targets, since it is aone-off.

But banking union is still paramount for Spain since itwould foster some confidence in its financial sector, which wascrippled by a decade-long building boom that collapsed fouryears ago leaving the banks with 184 billion euros of bad debt.

Rajoy has announced 65 billion euros in budget savings bythe end of 2014 to try to bring Spain's deficit downdrastically, in line with European Union targets.

But rising unemployment, falling tax revenue and therecession are undermining his efforts.

The Spanish government is acutely aware that next door,Portugal's severe spending cuts have failed to revive theeconomy.

On Tuesday, in Luxembourg at a meeting of European financeministers, Spanish Economy Minister Luis de Guindos said theeuro zone believed Spain's budget cuts programme should takeaccount of its recession.

In Madrid, the source close to the government said underEuropean rules if the government misses is deficit targetbecause of recession, the European Commission would not applysanctions for a missed deficit.

(Editing by Mike Peacock)

((fiona.ortiz@thomsonreuters.com)(+34 91 585 2167)(ReutersMessaging: fiona.ortiz.thomsonreuters.com@reuters.net))