Uncertainty for Portugal, Spain and... the Euro?

Portugal has asked the European Union to lend it tens of billions of Euros, becoming the third member of the Euro-zone asking for assistance after Greece and Ireland. The ramifications of the decision of the Portuguese government, will almost certainly involve cuts on public expenditures and wages of the Portuguese people. However, the consequences of the Portuguese bail out might lead investors to ask themselves who is going to be next?

The answer to that question is Spain.  The consensus among financial analysts is that Spain will not need to be bailed out by the other members of the European Union. However, the Spanish unemployment is hovering around 20% and the economy has not recovered yet from the housing bubble. Though at this time Spain seems to be secure from financial disaster, it only takes a rumor or a negative economic  indicator for speculators to begin a process of destruction that will not only affect Spain's fate but the Euro itself.

The Spanish economy is twice as big as the  economies of Greece, Portugal, and Ireland combined. The size of the Spanish economy coupled with the exposure of other European banks make Spain an economy "too big to fail". If a country or a financial institution is too big to fail it means that its failure could create a "systemic risk". The "system" here is the Euro-zone.

Though the European experiment is a great achievement in human history, and its further integration, the Euro-zone, might come to an end. If the Spanish economy fails, then the usual question the markets ask is "who is next"? If followed to its logical conclusion there will not be a "next" country. That is due to, if not all, most European countries, even the strongest like Germany and France, have high foreign debts. If Spain fails then the cost of borrowing for the other European countries will increase leading to a downward spiral that has no end in sight.

The aforementioned scenario is not likely to happen. That is due to one main reason. The foreign or domestic investors that have lend their money to European countries do not wish their investments to evaporate. Because if the Euro-zone fails and the European countries revert to their old currencies, it is certain that the investors will lose a great deal from their investments. And I am sure investors are rational individuals.