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Just as investors appear convinced that the US is well established on the road to a (very modest) recovery, Europe has reminded us all that she really is still very sick indeed.

And having forgotten her for a while, everyone has, with a weary sense of foreboding returned to her bedside.

The part that's hurting at the moment (it's not Greece; Greece is always hurting but there's nothing we can do about that) is Spain. And unlike her peripheries, if Spain starts giving her jip, well it could finish the old girl off altogether.

That's what began to happen this last week.

The cost of borrowing for Spain has been creeping up all year and, on Wednesday, it tried to auction off up to 3.5bn euros of bonds. It only managed to sell 2.5bn euros.

Now the yield on Spanish 10-year bonds is at 5.72%. Just a month ago it was below 4.9%. The cost of insuring oneself against a Spanish default through credit-default swaps (CDS) has doubled since the start of the year.

Only a week or so earlier the attention was being focused on Portugal, but that was missing the real story: the trajectory of bond yields there, which reflects the cost of government borrowing, has been heading down, while the Spanish yield has been going up.

A paper put out by the independent research company, Spotlight Ideas, early this month points out: "The recent track of Portuguese yields compared to that of the Spanish implies the larger Iberian nation is starting to loom large as the next potential fault line."

'Different from Greece'

The vulnerability of Spain lies not in its sovereign debt but in its bank debt, built up on a massive property bubble, which is still in the process of bursting.

The small local banks and cajas (unlisted savings and loan institutions) are hugely exposed to property and have so far been very slow in marking their assets down to realistic prices.

The Rajoy government's budget last week hardly makes it easier for them: 27bn euros in spending cuts and tax increases in order to get the deficit down from 8.5% of gross domestic product to 5.3%, just as the country's economy is expected to contract 1.7% on the year.

Stephen Pope, of Spotlight, says: "The problem lies in the fact that the tailing off of GDP is now going faster than the deficit reduction. The 5.3% of GDP deficit target set for this year, and next year's 3.0% is not just a stretch of the financial imagination... it is impossible.

"It's different from Greece, because the crisis is in banking, but by cutting back spending, the government is not giving the property market and the banks any chance to recover."

With unemployment rising and the property collapse, bad debts and mortgage arrears worsening by the month, the caixa are being squeezed beyond endurance.

They have managed to keep themselves going thanks to the cash hand outs from the Long-Term Refinancing Operations (LTRO) from the European Central Bank.

Much of that went into buying Spanish government bonds (Spanish banks took 15% - 79.5bn euros - of the total LTRO off the ECB). But with no more cash in the offing from the ECB (as far as anyone can see) and the government unable to bail them out, there's precious little they can do.

The crisis in the cajas and the mid-sized banks will effectively paralyse the economy and shrink it, further worsening the deficit.

Over this year, Mr Pope believes Spain will be back at the European Commission admitting it can't hit its targets and asking for either cash from the European rescue fund or a restructuring of its debt.

This prospect is having a withering effect on other markets: France held an auction on Thursday and had no problem in raising the money it wanted - it was three times oversubscribed - yet even with that amount of popularity it was forced to (very slightly) increase the yield to pull in the buyers.

Market reaction

The prospect of no growth in Europe has taken the wind out of the sails of the equity and commodity markets this last week.

The FTSE had its worst day for the year, the oil price slipped as did gold and most other commodities.

Most stock markets are overall still up sharply since the start of the year - the Nasdaq has made gains of some 19%. But while a large correction is unlikely, advances across the board are going to be hard in an environment where growth is so difficult to come by.

Mr Pope says: "Big companies with businesses outside Europe will still have the ability to do well, particularly in Asia, but the mid-cap stocks in Europe, whose businesses are regional or domestic, are going to find it very tough indeed."