Spain is a weak link in Europe not only because of its banks, but because of poor economic growth prospects. It is mired in its second recession in three years and forecast to shrink 1.7 percent for the year. Nearly one of every four Spaniards is unemployed. The rate is one of every two for those under 25.
Meanwhile, the government is trying to bring its debt as proportion of its economy down to strict European standards.
Spain’s plan is to fund the Bankia bailout through more debt. But the borrowing costs are close to 7 percent, a level many analysts believe is too high for a country to raise money on the bond markets in the long term. It is also the threshold that forced debt-stricken eurozone countries such as Greece, Portugal and Ireland — another country brought low by a property bubble and banking sector bailout — to ask for international assistance.
Markets across Europe and in the United States fell Wednesday on worries that Spain’s banking problems could be repeated across the region and push more banks to seek bailouts.
Ultimately, investors fear that the eurozone’s No. 4 economy behind Germany, France and Italy could need a bailout of the entire nation. Many believe that would be too big to handle because Spain’s economy is bigger than those of Greece, Ireland and Portugal together.
Britain’s FTSE 100 fell 1.7 percent while in France the CAC 40 lost 2.2 percent. The Dow Jones industrial average fell 1.3 percent. Meanwhile, the yields on so-called safe-haven bets such as 10-year U.S. Treasury bonds fell to near-60 year lows.
Spain was thrown a lifeline Wednesday by the European Union’s executive body, the European Commission. In its economic report, the commission called on the 17 countries that use the euro to create a "banking union" with the power and the money to take broken banks off governments’ hands, and to override national regulators who may be reluctant to force restructuring of failed financial institutions.