Mario Lopez writes from Madrid: ‘The 100 billion euro loan is a victory for the euro,’ declared Spanish Prime Minister Mariano Rajoy, before setting off for Gdansk to cheer on the national team against Italy. The game ended in a disappointing 1 -1 draw for the European champions. They could have easily lost. Rajoy’s victory cry is in the same groove: far from being a victory it is turning into a defeat. The markets had an hour or two of euphoria until the reality check kicked in: we’ve been had people, it’s a con! Some middle class families in Madrid are going to Red Cross centres to collect food hand-outs. That is the harsh reality of Spain today. Miners continue to block motorways and every interest group hopes that by demonstrating it can reverse the cuts in government expenditure. Common sense dictates otherwise. Spain has increased its national debt by about 10 per cent by adding another 100 billion euros. The government is recapitalising second tier banks and is determined to let none fail. So the government is taking over banks which in turn own government debt. Most states are trying to put distance between themselves and the banks. They are trying to offload as much of their sovereign debt as possible. Spain is going the other way. What happens when the rescued banks find that their assets have declined due to the economic recession? Madrid will automatically suffer further losses. The banking sector in Spain is three times larger than the national economy. There is no way it can cover the losses of its banks by itself. The country has reached a point when it can no longer go to the international markets for money. However, it will need to borrow billions to service its debts over the next few years. The worst case scenario is that Spain may need up to 500 billion euros to recapitalise its banks and defer debt obligations for a few years. So the way ahead is to allow capitalism to start functioning normally. Bad banks will have to be allowed to fail and private bondholders suffer a loss. Depositors will have to be protected. Spain needs fewer but more well run banks. The big three: Santander, BBVA and La Caixa will have to help the weaker brethren. Finland is demanding Spanish collateral in exchange for contributing to the 100 billion bailout. This raises the spectre of the Finns owning valuable property in Madrid and elsewhere. One can envisage a situation in which Spain, in order to secure the money it needs, will have to mortgage the whole country to foreigners. Cyprus now needs a bailout but it is so small that this will go through on the nod. The elephant in the room is Italy. Yields on its bonds have been creeping up towards the dangerous 6.5 per cent. The nightmare scenario would be for Rome to request a bailout because it could not borrow from the markets. If Syriza wins the Greek election on Sunday it will consign the austerity pact to the dustbin. It will also demand a handout from Brussels and Berlin to stay in the euro. No wonder the eurocrats are suffering from a headache which may develop into a migraine.