Analysts at Roubini Global Economics and Credit Suisse both estimate that Spain's banks will ultimately require a massive €250bn recapitalisation to soak up losses on bad debts (mainly property loans) - not the €40bn that Spain has talked about. It doesn't end there, either: stabilising the banking system doesn't solve the debt death spiral the country is locked into, with public borrowings expected to soar to 87 per cent of GDP by year-end.
And there is more pain to come. Even though the economy is deep in recession and the unemployment rate has trebled to 25 per cent since 2008, central government is committed to tightening public finances by 4.5 per cent of GDP this year through austerity programmes.
It's hardly a surprise that foreign investors - who own much of Spain's debt - have been heading for the exits, cutting exposure to Spanish debt from 50 per cent to 37 per cent of the total in the first quarter. They have good reason, as analysts at RBS calculate that a full-blown rescue of Spain and its banks could eventually balloon into a €450bn bail-out. With Madrid effectively priced out of long-term sovereign bond markets, France, Germany and Italy would have to backstop that vast sum.
If they did, the implications for Italy in particular would be serious. The country already stands behind 17.9 per cent of the European Financial Stability Fund, yet it's saddled with €1.9 trillion of public debt, equivalent to 121 per cent of economic output. With its economy forecast to shrink by 2.5 per cent this year and a further 2 per cent in 2013, public debt will total 137 per cent of GDP by 2014.
The EFSF's successor, the European Stability Mechanism, is not yet operational but in any case is not the answer - all this will do is subordinate other creditors and compound losses for existing debt holders.
Stock markets might be becalmed, but the bond markets are flashing red alert: 10-year bond yields have hit a four-month high of 6.28 per cent, and the spread between Italian and other eurozone yields is widening. The time is rapidly running out for Berlin - or Frankfurt - to take decisive action to stop the contagion spreading.
