DAVID MARK: Spain is the latest member of the European club of shame. It's joined Greece, Ireland and Portugal in accepting assistance from the rest of the eurozone. But unlike those other countries, Spain is only seeking assistance for its ailing banks, many of which are crippled with bad real estate debts.
And there are conditions. In return for access to 100 billion euros of European Union funding, the Spanish banks must restructure their operations. The Spanish government has to act as guarantor for any money that goes to the banks and doesn't come back.
Meanwhile, the original euro problem child, Greece, goes to the polls next weekend with voters there set to decide whether they're willing to endure more austerity to stay in the eurozone.
Business reporter Michael Janda has more.
MICHAEL JANDA: Former Greek prime minister George Papandreou gave a solemn warning to eurozone leaders.
GEORGE PAPANDREOU: We have reached the limit of patching things up. We have to make major decisions which create the confidence in the market.
MICHAEL JANDA: But another patch-up is exactly what happened over the weekend; with the European Union extending a 100 billion euro lifeline to Spain's struggling banks.
ILYA SPIVAK: Nothing about what happened here with Spain really resolves the core concern that the markets have.
MICHAEL JANDA: San Francisco-based Daily FX currency strategist Ilya Spivak. He says the bank bailout's effectively providing cheap money to Spain, which has seen its borrowing costs soaring on global bond markets as Europe's financial problems worsen.
ILYA SPIVAK: The way it's structured is as a bank rescue rather than a sovereign rescue. And what that allowed them to do here is basically forego any additional austerity. Essentially, Spain is able to borrow this money from the bailout facilities at much more favourable rates than they're able to get in the market, and they really don't have to do much extra work for it.
MICHAEL JANDA: That's not to say the bailout plan has no merits: it staves off the short-term risk of a big Spanish bank collapsing and the shockwaves of bad debts that would trigger in other financial institutions around the world.
And the managing director of Market Economics, Stephen Koukoulas, says the bailout does impose some sensible conditions on the recipient Spanish banks.
STEPHEN KOUKOULAS: The consequences for taking this bailout money is that the banks have to change the way they do business; they don't have proprietary trading, they get back into what I daresay is old fashioned banking: taking deposits, making loans, undertaking transactions on behalf of clients; rather than having risky procedures, lending too much money to people who have a high risk of not being able to pay you back.
MICHAEL JANDA: But the Spanish government is underwriting the European Union loans. Ilya Spivak says that leaves it on the hook for a bank collapse, which has many analysts speculating that the Spanish government will be back for its own bailout funding within a couple of years.
ILYA SPIVAK: Spain in a lot of ways has a similar issue to Ireland, in a sense that essentially the state is on the hook for the banking sector.
MICHAEL JANDA: That's in stark contrast to Greece, where the banks are on the hook for their exposure to Greek government bonds. And the future of the Greek government will be the focus of financial markets this week and next with a general election on Sunday.
If you wonder why a country as small as Greece worries markets so much, George Papandreou sums it up.
GEORGE PAPANDREOU: Greece has become the precedent. Are the institutions in Europe and the politicians in Europe ready to solve small problems like Greece in a credible way? If we can't do it with Greece how are we going to do it with Spain? How are we going to do it with Italy?
MICHAEL JANDA: That's why traders are sweating on the Greek election result. Polls at the start of June showed the pro-bailout right-of-centre party New Democracy slightly ahead of its left-wing anti-austerity rival SYRIZA.
But the margin is tiny, and Ilya Spivak says SYRIZA's plan to push for a rollback of austerity tied to the EU's bailout packages could lead to financial disaster.
ILYA SPIVAK: The essence of their strategy is basically to play a sort of game of chicken with Germany and the other major lending nations, and say 'well if you don't want to risk a Greek exit and the havoc that would rain on the markets you will do what we say. And essentially let us get away with no austerity, etc, etc, etc.'
MICHAEL JANDA: And that's a very dangerous game?
ILYA SPIVAK: That would be a nightmare, that would be a nightmare, because the level of uncertainty that that would bring to the markets would be potentially something like 2008 but scarier.
DAVID MARK: That's Daily FX currency strategist, Ilya Spivak, ending that report by Michael Janda.
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