Spain has caught the attention of euro crisis observers recently, with borrowing costs rising and the IBEX 35 hitting a three-year low.

And for good reason: a housing bubble broken by the financial crisis has ravaged the banking system and spread into the greater economy. Without the help of Spain-specific monetary policy—and amid more and more rounds of austerity measures—it appears that these problems will only grow worse in the future.

While Spain is not insolvent, the Portuguese default analysts are already expecting could generate a firestorm that would topple Spain's banks and leave the country reeling.

Banks hold more troubled real estate assets than non-troubled ones.

Of all €323 billion ($422 billion) in assets linked to loans from developers, some €175 billion ($229 billion) are considered "troubled" by the Spanish government.

Source: Spanish Ministry of Economy and Competitiveness

Spanish home prices continue to fall, exacerbating the consequences of its housing bubble.

Societe Generale analyst Michala Marcussen wrote last week that home prices will likely fall another 15 percent in the 2012-2013 period. They have already dropped 25 percent from their peak.

Citi's Willem Buiter argued in a similar note two weeks ago that the decline in Spanish land and property prices is probably less than halfway complete. He ultimately expects them to drop 60 percent from their peak.

The struggling Spanish financial sector is highly exposed to Portugal.

Recent estimates show that the Spanish financial sector has €78.81 billion ($103 billion) in exposure to the neighboring country.

Source: Bank of International Settlements

Spain's economy is expected to shrink by 1.7 percent this year.

Manufacturing is unlikely to dig the country out of recession. Its manufacturing purchasing managers' index in March came in at 44.5—the worst reading in 11 months—showing that the economy is contracting.

Even the head of the Spanish Central Bank admits that commercial banks will need more capital if the economy continues to deteriorate.

"If the Spanish economy finally recovers, what has been done will be enough, but if the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities," Central Bank Governor Miguel Angel Fernandez Ordonez told reporters in a Madrid conference on April 10.

Source: Reuters

The Spanish government recently passed the most severe austerity budget since it transitioned to democracy 30 years ago.

That will include €27 billion ($35 billion) in cuts from the central government's budge, funding cuts of 17 percent for Spanish ministries, and a freeze on civil servant wages.

Bloomberg reports that Spanish PM Mariano Rajoy unveiled a new round of €10 billion ($13 billion) in cuts to basic government spending on April 10.

Spain has already failed to bring its budget in line with EU standards.

It is now shooting for a total budget deficit equal to 5.3 percent of GDP this year and 3.0 percent in 2013. It had to revise targets higher for 2012 from a goal of 4.4 percent EU leaders had previously demanded.

Source: The Economist

50.5 percent of youths under age 25 are unemployed.

24.3 percent of the total population was jobless in February 2012.

Source: Eurostat

And Spain's autonomous regions have rebelled against attempts to bring budgets under control, compounding problems in the financial sector.

The government of Catalonia refused orders from the government to aim for a budget deficit of 1.3 percent last year, saying it would instead target 2.6 percent. It ultimately recorded a deficit of 3.7 percent in 2011.

Further, a recent election in Andalusia failed to return a majority for the ruling central government party Partido Popular, potentially compromising its ability to push austerity measures through uniformly across the country.

Borrowing costs are shooting higher, hitting levels not seen since before the European Central Bank offered the first of two three-year LTROs in December.

Yields on 10-year government bonds are already flirting with 6 percent, after falling below 5 percent in late February.

Here's why things got so bad.

The Doomed Spanish Financial Sector Illustrates The Shortcomings Of LTROs >

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