Who will blink first, Spanish Prime Minister Rajoy or the bond market? Rajoy is willing to gamble with the bond market as well as the Germans as he hopes that an additional rollercoaster ride of Spanish bond yields will allow him to negotiate much better terms for a full bailout than what he is currently able to receive.

Greece will be furious if Spain will be able to get an acceptable bailout since Greece was used as an example and hammered with economically unsustainable austerity measures in order to force the country into receivership. Spain has witnessed its bond yield to yo-yo over the past week weeks and Rajoy refuses to ask for an official bailout despite the sharp deterioration of Spanish finances.
Rajoy decided to go all in and watch for the Germans next move. He hopes that the worse the Spanish situation will get the better the terms for a bailout will be as the Germans may realize that it will cost more and more to save the EU’s fourth largest economy the longer a bailout request is phased into the future. In reality, the instance Spain officially requests a bailout it will tear the country into pieces.

Rajoy is rumored to keep this game intact until potentially mid-November before he will be forced to request a bailout which has not been priced into global markets and will spike an extreme sell-off. Rajoy will have to sell his stance to his EU partners in two days during their next summit. Rajoy has divided EU leaders into either the German camp or the Franco-Italian camp.

Germany prefers for Spain not ask for a bailout, while France and Italy are pushing for a bailout which would trigger ECB bond purchases. Italy has a strong interest in Spain asking for a bailout before they will have to get on their knees and assume the preferred beggar position. Italy has joined Spain when it comes to refusal to seek a bailout as they are aware of the terms they would be forced to accept.

A bailout of Spain would test all the mechanisms EU leaders have put in place. Those mechanisms are a drop of water in the Atlantic Ocean and will crumble when Spain decides to tear apart the country which is expected to begin in roughly four weeks. Spain hosts the EU’s biggest unemployment force together with a stagnant economy and unsustainable debt levels which continue to move north.

Rajoy will not ask for a bailout until after regional elections in Galicia and the Basque country on October 21st. He hopes he can avoid the painful road to a bailout, but bond markets will have a word to say and so far they have resumed their climb to levels which will eventually force Spain to either make the right choices or burry their knees into the sand and ask for a bailout with the conditions forced onto them by its lenders.

In the meantime Rajoy hopes he has enough time to continue his reforms and that bond markets give him enough time until the Germans will offer Spain a much better deal. Either way, Spain is unlikely to do the smart thing and will initiate a process which will leave the country torn into pieces with the start of the Catalonian secession. Spain will miss its fast closing window of opportunity and will start to pay the full price for its negligence starting in 2013.