The debt in Spain causes more and more pain

Tomorrow will open with a judgment on the current state of Spain's banking system. Only then will the full effect of Fitch's downgrade on Friday, announced to avoid an immediate market reaction, take hold. (As an aside, ratings agencies are acting to avoid political ire. Regulators on both sides of the Atlantic are set to establish new rules that could curb the independence of the ratings agencies and allow politicians to regulate what information is used for market judgement).

Throughout the weekend, Caja Madrid has been negotiating to merge with five smaller rivals and facilitate continued access to the bank's rescue fund. Spain is making a fundamental mistake, and copying Japan's response to debt: merging bad banks to crate bigger bad banks.

Spain does not have the political strength to carry out austerity. The paycuts, welfare cuts and tax rises will prove an expenditure of valuable political capital when haircuts are required.