Who's Next on the Debt Chopping Block?

Markets reacted positively to the Spanish banking sector bailout for about two hours before the sobering reality of the situation set in.

That reality is that Spain will problematically be receiving loans from countries with similar problems, and ones that will ultimately subordinate current holders of Spanish debt, thereby causing more confusion in the marketplace.

A statement from Credit Suisse put it well: Portugal cannot rescue Greece, Spain cannot rescue Portugal, Italy cannot rescue Spain (as is surely about to become all too abundantly clear), France cannot rescue Italy, but Germany can rescue France.

Translation: All roads lead to Frankfurt. And at present Germany does not support using euro zone bailout funds (EFSF and ESM) to prop up individual banks. Those funding vehicles are designed to support a sovereign government -- not institutions within that sovereign government's territory.

Further, Germany has constantly maintained that if a sovereign country's liability becomes a joint liability spread across euro zone member states, that country must cede control to the Union and agree to fiscal austerity.

How does that plan play out in the long run?

George Soros put it well in a statement delivered last week at the Festival of Economics in Trento, Italy: The authorities didn't understand the nature of the euro crisis; they thought it is a fiscal problem while it is more of a banking problem and a problem of competitiveness. And they applied the wrong remedy: you cannot reduce the debt burden by shrinking the economy, only by growing your way out of it.

Once again, the problem has not been solved, as the main issue remains to be addressed: competitiveness across EU member nations.

The economic architecture of the euro zone has yet to be understood, and may take years to address. Until then, be wary of short squeezes on on the euro, equities, and euro zone debt. .