After the last few weeks of turmoil in European markets, jittery investors have every reason to be worried about the economic woes in the eurozone. After repeatedly claiming its government would not need a bailout, Ireland has officially reached out for an EU/IMF-style bailout that could cost, according to Goldman Sachs, close to $130 billion. This greatly dwarfs the Greek bailout from earlier this year.

Accordingly, Irish banks have taken a brutal hit to the chin. Allied Irish Banks (NYSE: AIB) has dropped by 10% and shares of Bank of Ireland (NYSE: IRE) have plummeted by more than 50% in the last month. Even National Bank of Greece (NYSE: NBG) has gone down by more than 25%.

Spain is a different beast
Now that the Irish bailout is all but hammered out, investors are turning next toward Portugal and Spain, two of the remaining PIIGS nations (which also include Italy) that seem most likely in trouble.

However, it would be premature to assume that Spain will need a similar style rescue package. Despite a pretty heavy concentration on the construction sector, Spain's economy is projected to see modest growth by next year -- pretty important considering it is the world's 12th largest economy as of 2009. In addition, Spanish public debt as a percentage of GDP was only 53.2% in 2009, compared with 115.8% for Italy, 113.8% for Greece, and 64.8% for Ireland.

So far this year, Spain's central government's deficit has fallen to 2.96% of GDP from 5.63% during the same period a year earlier, as a 11% boost in tax revenues helped to stem very weak housing and banking sectors. This drastic cut in the deficit is much more than Ireland, Greece, or Portugal have been able to achieve and is a promising indicator that the government has the stomach for reform.

So far the government has announced a massive overhaul of the pension system (freezing pensions for the next year), reduced infrastructure spending, and increased the value-added tax by 2 percentage points.

Investors not buying it
Nevertheless, yields on Spanish bonds are rising as fear propels itself into both the equity and bond markets. The additional yield spread that investors demanded in order to hold Spanish debt instead of German bonds rose to 222.8 basis points, a euro-era high.

With unemployment over 20% and being one of the last countries to emerge from the Great Recession, Spain is being punished for not having a more dynamic economy and for being slow to implement necessary reform. Banks such as Santander (NYSE: STD) and Banco Bilbao Vizcaya (NYSE: BBVA) have plummeted by more than 20% in the last month, and even companies such as Telefonica (NYSE: TEF) and Repsol (NYSE: REP) are watching their shares drop sharply.

Spanish Prime Minister Jose Luis Rodriguez Zapatero is trying to dispel fears about his country's ability to survive without aid, saying that there is "absolutely" no chance Spain would need any help. However, these statements have done little to quell panic, as Spain accounts for 11.7% of eurozone GDP and is roughly double the size of Ireland, Greece, and Portugal combined.

Simply put, a Spanish bailout would prove catastrophic and would ultimately wipe out the EU/IMF emergency fund set up earlier this year.

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