Bloomberg View: A Stronger Antidote for the Pain in Spain

The agreement to provide as much as €100 billion ($125 billion) to Spain’s banks shows Europe’s leaders are at least beginning to recognize the magnitude of the task of saving the euro area’s fourth-largest economy. The amount matches some of the higher estimates of the capital the banks will need to offset heavy losses related to the country’s real estate bust. As such, it might help inspire the confidence necessary to slow the flow of money out of the country and lower the odds of an all-out bank run.

The deal, though, fails to address a fundamental issue that has been spooking markets: This is the worst possible time for Spain to borrow €100 billion. Under the agreement, any amount used to bail out Spain’s banks will be added to the country’s government debt, potentially pushing it to a net 70 percent of gross domestic product, from about 60 percent today. Spain is already struggling to sell its government bonds to anyone other than its own banks; the sudden increase in debt could cut it off completely from private financing.