Europe's Worst Fear - Spain and Greece Spiral Down Together - NYTimes.com LONDON - In a season of nightmare projections for Europe, this one could be the scariest: Greek leaves the euro currency union at the same time Spain's banking system is collapsing. In many ways, the market convulsion last week was a test run for those crises, as political deadlock in Greece and mounting fears over the health of Bankia, one of the largest consumer banks in Spain, converged. The credit ratings agency Moody's Investors Service downgraded the entire Spanish banking sector Thursday. As investors gird for another challenging week, they will be hoping European leaders in Brussels, if not Frankfurt where the European Central Bank is based, can finally start to map out an action plan. It is not clear that policy makers have many good options. The money available to Europe within its main bailout fund, about €780 billion, or $997 billion, would not be enough to handle the twin calamities of a Greek euro exit and a Spanish banking implosion. And despite recent statements from Germany and from leaders of the Group of 8 industrialized nations meeting in the United States over the weekend to encourage economic growth in the euro zone, the European tax-paying public may have little desire to continue financing the debt disasters of other countries. "When you have Greece and Spain happening at the same time, the problem becomes exponential and very, very dangerous," said Stephen Jen, a former economist at the International Monetary Fund who runs a hedge fund in London. So far, the policy has been to buy time and build a firewall - but that just makes the cost bigger. There is just no good ending here. The numbers do look dire. Stephane Deo, an economist at UBS, estimates that the cost of a Greek exit to European taxpayers would be €225 billion, assuming Greece defaulted on the money it now owes to European public institutions. But, he says, the real fear is that while that was happening, the slow-motion collapse of Spanish banks from toxic real estate loans could suddenly turn into a fast-moving bank run, as depositors pulled out their money. With Spanish banks now holding deposits of €2.3 trillion, such a loss of confidence could be disastrous for Spain and for the highly interconnected global banking system. The financial world's assumption lately has been that it is sufficiently prepared to absorb the consequences of a Greek withdrawal from the euro. But if a Spanish banking collapse were factored in, Europe's long-dreaded "Lehman moment" might finally arrive. "The scale is just so much bigger, when you talk about Spain," Mr. Deo said. Technocrats in Brussels will readily say that what is now keeping them up at night is Spain. They are trying to see beyond the tools that so far have kept a true crisis at bay: the two rounds of low-cost loans that the European Central Bank extended to commercial banks late last year and earlier this one, and the €780 billion bailout fund. One potential new tool, according to Mr. Deo, would be for Europe to guarantee the bank deposits of at-risk countries like Spain. This would be similar to the way the U.S. government increased deposit insurance during the financial crisis in 2008 to head off a bank run. It would be an expensive undertaking, to be sure, and one that would have to be bankrolled largely by parsimonious Germany. But such a drastic step might steel the shaky nerves of Spanish depositors. Just such a step was briefly considered by European policy makers last year. But it was shelved on the assumption that North European taxpayers would not be inclined to back the banking system in Spain - or in Italy, whose own banks have still not regained a solid footing, or in other euro zone convalescents. And without an allocation of new money, there could be no new guarantees for depositors. The total banking deposits in Spain, Italy, Portugal and Ireland are €5.5 trillion, or seven times the size of the main European rescue vehicle, the European Financial Stability Facility.