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It’s official: Spain is in recession.

The Banco de EspaƱa has come out with its first estimate for Q1 2012 GDP, and it has the nation’s economy shrinking 0.4% on a sequential basis.

That’s the second straight quarter of decline.

And given the harsh austerity measures that are being imposed, and the likelihood that the property bubble has more bursting to do, it seems likely that this is just the beginning of Spain’s woes.

From a big-picture perspective, Spain’s problem isn’t government debt per se, but the precarious situation at is overlevered banks (many of whom will be reporting earnings this week).

With more economic weakness, and more real estate problems ahead, Spain’s banks are expected to need a lot more capital, thus threatening the government’s balance sheet in the event of bailouts.

Spain is simultaneously too big to save and too big to fail, and may ultimately require a Eurozone solution that’s much bigger and more wrenching that the process in Greece, which was horrible enough in its own right.

chart of the day, spain's gdp growth vs the euro area, april 2012

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