At present, the EU is bailing out Spain's banking sector to the tune of about $120 billion. But that's a drop in the bucket if Spain needs a bailout of its economy. And given the signs from Spain's economically autonomous regions, it could be that the day is fast approaching when Spanish debt will sink the euro once and for all.
Spain's borrowing rates hit a record high on Monday, increasing the risk it might need a sovereign bailout, as investors worried the government would be overwhelmed by the debts of its banks and regions.
The yield on Spain's 10-year bond spiked 0.22 percentage points to 7.45 percent. That is the highest level since the euro began in 1999 and is considered unsustainable for more than a few months. Stocks tanked as much as 5 percent before recovering slightly after the Spanish market regulator banned short-selling of shares.
Concern over Spain increased after the central bank said Monday that the economy contracted by 0.4 percent during the second quarter. The government predicts the economy will keep contracting into 2013 as new austerity measures - such as tax hikes and benefit cuts - hurt consumers and businesses.
The gloomy outlook has increased worries about public finances because shrinking economic output deprives the government of revenue it needs to lower debt.
Investors also worry the government will face new costs to help its ailing banks and regions. Spain has asked for a eurozone bailout package of up to €100 billion ($121 billion) to save the banks, but is ultimately liable to repay the money if the banks do not.
If Spain's borrowing rates continue to rise, the government may end up being locked out of international markets and be forced to seek a financial rescue, like Greece, Ireland and Portugal.
"The higher the yield goes, the more untenable the situation becomes," said Rebecca O'Keeffe, head of investment at Interactive Investment.
Spain has called for the European Central Bank to take emergency action to ease its government borrowing rates. In the past, the ECB has bought bonds on the open market, lowering their yields, or interest rates. It has also given banks €1 trillion in cheap loans to ensure they have enough cash to lend to the economy.
Couple that with indications that Greece is backsliding on its deal with the EU that will inject $180 billion into the economy, thus forcing the country off the euro, and you have the predictable panic selling on Wall Street and the world markets.
Spain will be able to limp along for a few months while the ECB kicks the can down the road again. But eventually, it will be impossible for Spain to pay its debt and the EU's hand will be forced. They could probably manage a bailout for Spain, but if other nations start defaulting because of the Spanish crisis, there aren't enough printing presses in the world to cover the contagion.