Spanish weirdness

This is just strange. The economic crisis in Spain is much more like that in U.S. than what happened to Greece--the bursting of a housing bubble left an immense black hole on the balance sheets of banks, leading to contracting of lending, thus investment, and of consumption because of the burden of underwater loans on borrowers, exacerbated by unemployment--with the key difference that the bond market isn't letting the government cover the losses for free as it is in the U.S. There's an additional wrinkle to the story that the Spanish government failed to actually get all of the garbage off of bank balance sheets, and the banks have been limping along in part pretending the assets are still good when they're not. To cover their losses, the banks (when they haven't been bailed out) have apparently been borrowing from the ECB and (as in the U.S.) buying up Spanish government debt. The idea is that the income stream from government paper is a relatively sure thing, and so if (as with the recent ECB lending program) the bank is guaranteed funding for a set period at a certain rate (3 years, I think in this case), as long as that rate is lower than the return on bonds, it's a guaranteed income stream. One problem, though. Unlike treasuries, spanish government debt is not exactly a safe asset these days. This has set up the delightful situation (described in the link above) of Spanish banks owning an increasingly large share of Spanish government debt, such that if the Spanish government tried to reschedule those debts, it would pretty much kill the banks outright, requiring a bailout, which the government couldn't afford.