The euro zone is grappling with another dangerous phase of the financial crisis. This past Monday, Moody's lowered the outlook on Germany's triple-A credit rating from stable to negative. On Tuesday, EU officials said Greece is unlikely to meet its obligations and will require further debt restructuring. What's more, markets are increasingly wary of Italy's fiscal situation.

Now, All Eyes On Spain

Yet it is Spain, Europe's fourth-largest economy, that remains the focal point of the European debt crisis again this week. Interest rates on 10-year bond yields alarmingly have risen again above 7 percent. There is widespread concern that the country may require a full bailout. This is a scenario that the euro zone appears ill-equipped to handle.

European countries have had trouble sticking to previous arrangements to ease the crisis. For instance, the strongly lauded deal of late June to allow direct lending to ailing European banks seems to have died in the German legislature.  The Bundestag voted last Thursday to approve a €100 billion or $121 billion rescue fund for Spain, but refused to let the Spanish government off the hook. The money would be lent to and guaranteed by the Spanish government and not go to the banks themselves.

The German vote is illustrative of the many roadblocks that Europe faces as it seeks better coordination to address the crisis. It also points to the challenges to achieving further financial and political integration in future.  With the government of Spain reporting that the economy is expected to continue contracting into next year, it is extremely likely that Spain will require additional funds in the coming weeks and months and it is also clear that budget cuts alone will not bring the country out of its deep recession.

Not Just Another Spanish Crisis

It must be remembered that this is not merely a Spanish crisis, nor is Spain another Greece. Just three years ago, the Spanish banking sector had received wide praise. During the darkest days of the global financial crisis, the Spanish banking sector was considered among the most solid of any rich country. So much so that in August 2009 the FDIC approved the sale of Guaranty Bank of Austin, Texas (the 12th largest bank failure in U.S. history) to BBVA Compas - the U.S. arm of Spain's Banco Bilbao Vizcaya Argentaria SA (BBVA).

It was a rare case of a U.S. failed bank being sold to a subsidiary of a foreign lender, and it was a Spanish bank.  It was a good bet too, since, in the words of Laura Mandaro and Benjamin Pimentel's, in a Marketwatch.com article of Aug. 22, 2009, "BBVA has pursued an expansion strategy in North and South America and avoided the worst of the financial crisis by sticking to traditional banking businesses." While Bank of America shares were tanking in 2009, BBVA had reported a 35 percent net profit rise over the previous quarter.

Not only was the banking sector healthy, but government finances were - and in relative terms, are - in pretty good (or less poor) shape. Even now, the country continues to have a debt level that is lower than in other rich countries. With a debt to GDP ratio of 79 percent, it compares favorably with debt to GDP ratios in other peripheral countries: 101 percent for Portugal, 120 percent for Italy, 168 percent for Greece and 108 percent for Ireland. The United Kingdom, France and even Germany have higher debt to GDP levels than Spain at 81 percent, 85 percent, and 82 percent, respectively. Even the largest rich world economies, the United States and Japan, have debt to GDP ratios of 86 percent and 230 percent, respectively.

Spain's Troubles: Rooted In Housing Bubble

It other words, neither private sector banks nor the public sector have had poor track records.  Spain is the victim of a terrible real estate crash, resulting in the rise of bad loans, and the need for the Spanish government to bail out a banking system with inadequate policy tools. Unlike in the United States, where the crash led to central bank intervention -- the U.S. Federal Reserve and U.S. Treasury purchased assets and supported government bonds -- Spain as a member of the euro zone has fewer policy options. Spain and other euro zone members must continue looking to negotiate for help with the troika of the ECB, the EU, and the IMF. More discouragingly for Europe, there is little talk of how to get beyond the cuts with few solutions on offer to stimulate growth in Spain and the other countries mired in recession.

Next Wave Of Financial Crisis Has Arrived

Taken together, the Spanish crisis, last week's German vote, the troika's talk this week of the possible withholding of funds from Greece, and now the downgrading of the credit outlook for Europe's strongest economies, point to a worsening of the crisis and a failure at coordination among European governments on the one hand, and between European governments and the troika on the other. The danger is that continued policy dysfunction will diminish support for the euro zone and put the single currency at risk, as well as the health of the global economy.

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Prof. David Felsen is a commentator and an associate professor of international studies at Alliant International University in San Diego, Calif.

Felsen can be reached at felsendavid@yahoo.com.