Cristobal Montoro
Cristobal Montoro Reuters

A minnow and a marlin have joined the European debt crisis. Cyprus has announced that it will need a bailout with the Cypriot leaders blaming the country's exposure to Greece for the problems. As Cyprus has a very small economy by European standards a bailout for Cyprus is a mere hiccup. The same cannot be said for Spain, the 4th largest economy in the European Union. Spanish Prime Minister Mariano Rajoy tried to assure Spanish citizens that the country was not on the verge of the apocalypse.

Today however the country's Budget Minister Cristobal Montoro asked his Euro zone partners for direct help to Spain's ailing banks that were mortally wounded when the country's housing bubble collapsed leaving the banking system with $272 billion in bad real estate loans. The government was forced to pump in €19 billion to rescue and nationalize Bankia .

The rescue came at a price because Spain now finds itself shut out of the credit market. 10 year bonds command 6.42% interest meaning that Spain is in dangerous territory. It must market massive additional  debt in the near future. Investors are starting to panic and last month $80 billion was withdrawn from Spain.

While Rajoy claimed as late as Saturday that Spain could weather the crisis on its own, Montoro has now signaled that Spain needs outside help. Montoro is aware that the European Union would be frightened by the dramatic dimensions of a Spanish bailout that would dwarf the Greek, Irish, and Portuguese bailouts put together. Therefore he is saying don't bail us out but provide us with assistance to recapitalize our banks so the Spanish government doesn't have to pump money into them. This would relieve Spain of its credit stranglehold and this could be done on the "cheap" a mere bagatelle of €40 billion. “That’s why it’s so important that the European institutions open up and help us achieve, help facilitate, that figure because we’re not talking about astronomical figures,” explains Montoro.

The proposal has encountered some takers in the European Union including the new French finance minister Pierre Moscovici and EU economy Commissioner Olli Rehn. They see the measure as presaging the euro zone's evolution into a banking union. However there are also naysayers who point out that the banks are not the only Spanish problem and the major source of debt is the regional governments of Spain who during the good years went on spending sprees. It makes no sense to tackle just the bank problem when Spain also has budget deficits. Additionally, injecting the money directly into the banks rather than into the Spanish government in the form of a bailout means that the money will come with far less conditions attached. Such an arrangement would also arouse questions in Ireland that was forced to seek a bailout that is accompanied by heavy doses of austerity following the collapse of a housing bubble and the unbearable pressures on the Irish banks.