[Kalobbis]

June 18, 2012 4:01 PM | By Constantine von Hoffman | CBS Moneywatch

Greece's pro-bailout New Democracy party narrowly won a victory Sunday in an election
once seen as critical to Europe's economy. Despite all the attention, the issue of whether
the Greeks remain in the euro is now a secondary concern. Its importance has been
entirely eclipsed by the increasing danger of Spain's economic collapse.

A victory by SYRIZA was what's worried many observers because of the impact a default
by Greece would have had on investors' already rapidly-diminishing confidence in the EU.



However, the collapse of Spain's banking system over the last two weeks now dwarfs the
problems posed by what is happening in Greece. It is now the largest threat facing the
economy, not just of Europe but of the world. Because of this there will likely be little good
news when markets around the world open tomorrow, despite New Democracy's victory.

Spain's already tenuous economic situation went critical two weeks ago when its fourth
largest bank asked the government for a $24 billion bailout. Although Prime Minister Mario
Rajoy said he would not seek a bailout, rising interest rates and the debt crisis of Spain's
regional governments left him with no choice. Last week, the European Union responded by
putting together a $125 billion loan to recapitalize the entire banking system. This move
failed to reassure investors and on Friday Spain's 10-year bonds closed at 6.87 percent.

The governments of Greece, Ireland and Portugal all sought international bailouts within
weeks of their bonds hitting 7 percent. That level has become an indicator that the nation
has lost the confidence of the markets and that the banks within that nation can no longer
buy enough bonds to keep the interest rate down.

Spain is the world's 14th largest economy in terms of GDP, and the fourth largest in the
EU. Greece's economy, the 41st largest in the world, is roughly the size of that of Spain's
most prosperous region, Catalonia. Because of its size, a bailout of Spain is impossible -
even if the EU, European Central Bank and IMF were to combine all of their resources.