Spanish Bailout: Big Questions Still Remain

While European soccer players were expertly kicking the ball down the field this weekend in the Euro 2012 tournament, European finance ministers were expertly kicking their debt crisis down the road.

Spain's request on Saturday for a 100 billion euro loan (about $125 billion) to recapitalize its banks seems likely to be at least a short-term solution to the worries lately that have gripped European financial markets, raising concerns about a global economic slowdown that could push the United States back into recession.

As the odds of a bank run in Spain have increased in recent weeks, Spanish borrowing costs have soared, while the values of the euro and risky assets such as stocks and commodities have tumbled. Saturday's news could at least temporarily reverse some of those ugly moves.

Even better for Spain, it gets to avoid additional austerity measures as a condition of the loan, as Greece and other bailed-out nations have suffered in the recent past.

But still some big questions linger.

First, will 100 billion euros ultimately be enough? A report by the International Monetary Fund suggests this will be more than enough and that Spanish banks need to raise 60 billion to 80 billion euros to mollify investors and cover losses in Spain's real estate market.

But those losses might continue to grow, which would mean that Spain has to go back to the well again. JPMorgan Chase analysts recently estimated that Spain could need as much as 350 billion euros, the Telegraph reported.

Second, rather than injecting the money directly into Spain's banking system, European nations will lend it to Spain. This means that Spain, already more than 700 billion euros in debt, could end up more than 800 billion euros in debt. The new debt has been promised at a considerably lower interest rate than the market currently charges Spain -- recently more than 6 percent for a 10-year loan. Still, every little bit of extra debt hurts. How much will the market punish Spain for having more of it?

Finally, there's the question of who might be next. Now that Spain's bleeding has been temporarily stopped, all eyes are quickly turning to Italy, whose banks are also in trouble and whose own borrowing costs are rising. And no one has forgotten about Greece, which holds a new parliamentary election next weekend that could determine its future in the eurozone -- an event that could spark fresh market turmoil and have European officials holding hasty bailout conference calls all over again.

Ultimately, longer-term solutions will probably involve even more painful political choices than Spain's decision to seek a bailout. Those choices will include nations giving up some control over their own fiscal affairs, to form a more unified Europe. Officials may have kicked such choices down the road just a little bit longer this weekend, but they're going to run out of road one of these days.

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