We have viewed the structure of the Spanish bank bailout as a critical test of Europe's ability to arrive at workable solutions to its debt crises. Had Germany forced the bailout loans to be added to Spain's existing debt burdens, then Spain could have joined Greece, Ireland, and Portugal in losing access to private debt markets and needing a total government bailout. Almost immediately upon announcement of the deal, Spanish 10-year yields fell from 7 to 6.25% and European stocks rallied 4 to 5% in dollar terms. Both are at important technical levels, and follow-through is needed (in our opinion) to confirm that last Friday's rally in risk assets was anything other than traders being caught positioned the wrong way (see Weekly Chart). We are certainly open to that possibility.

David Fuller's view Unfortunately, Spanish 10-year government bond yields steadied yesterday and rallied sharply today, closing at 6.775%. They need a sustained break back beneath 6% to reduce crisis anxiety. Not surprisingly, higher yields checked the rally in Spain's IBEX 35 Index and it needs to hold above the mid to late-June reaction lows if this recovery is to be extended in coming weeks.

There is a Hydra-esque* quality to this crisis and while its resolution will require a collective effort, I think only ECB President Mario Draghi is capable of wielding the golden sword needed to cauterize it, and this is likely to take time.

*(Read: The Second Labour of Heracles.)