(MoneyWatch) Greece's pro-bailout New Democracy party narrowly won a victory Sunday in an election once seen as critical to Europe's economy. Despite all the attention, the issue of whether the Greeks remain in the euro is now a secondary concern. Its importance has been entirely eclipsed by the increasing danger of Spain's economic collapse.
An early official projection from the interior ministry Sunday showed New Democracy taking 29.5 percent of the vote. This put it narrowly ahead of anti-bailout SYRIZA, which was in second place with 27.1 percent. However, New Democracy's ally, the Socialist PASOK party, was in third place with 12.3 percent. The projection was based on votes counted at about 12 percent of polling stations and sent to the ministry via text message. It proved highly accurate in predicting the outcome of last month's inconclusive election.
If these numbers hold up, it will mean 128 seats for New Democracy and 33 seats for PASOK, giving them an 11-vote majority in the 300-seat Parliament. Projections by other groups also showed New Democracy and PASOK winning, although with slightly smaller number of seats.
Although New Democracy has said it will not reject the bailout agreements between Greece and the EU, European Central Bank and the IMF, it has promised to renegotiate their terms.
A victory by SYRIZA worried many observers because of the impact a default by Greece would have had on investors' already rapidly-diminishing confidence in the EU.
However, the collapse of Spain's banking system over the last two weeks now dwarfs the problems posed by what is happening in Greece. It is now the largest threat facing the economy, not just of Europe but of the world. Because of this there will likely be little good news when markets around the world open tomorrow, despite New Democracy's victory.
Spain's already tenuous economic situation went critical two weeks ago when its fourth-largest bank asked the government for a $24 billion bailout. Although Prime Minister Mario Rajoy said he would not seek a bailout, rising interest rates and the debt crisis of Spain's regional governments left him with no choice. Last week, the European Union responded by putting together a $125 billion loan to recapitalize the entire banking system. This move failed to reassure investors and on Friday Spain's 10-year bonds closed at 6.87 percent.
The governments of Greece, Ireland and Portugal all sought international bailouts within weeks of their bonds hitting 7 percent. That level has become an indicator that the nation has lost the confidence of the markets and that the banks within that nation can no longer buy enough bonds to keep the interest rate down.
Spain is the world's 14th largest economy in terms of GDP, and the fourth largest in the EU. Greece's economy, the 41st largest in the world, is roughly the size of that of Spain's most prosperous region, Catalonia. Because of its size, a bailout of Spain is impossible - even if the EU, European Central Bank and IMF were to combine all of their resources.