As Spain is under debt heat, an American economist says the country needs an additional rescue plan.

As German and Spanish finance ministers were holding talks on Tuesday, global stocks fell and the euro dropped to its lowest level in two years.

The sharp fall came over concerns that Spain might need a large-scale bailout. That also put investors on notice the mounting debt in Spain.

Luis Cabral, professor with New York University of Stern School of Business, says three factors intensify Spain's increasingly desperate struggle to put its finances right.

SOUNDBITE (ENGLISH) LUIS CABRAL, NYU STERN SCHOOL OF BUSINESS:
"It comes from 3 different sources: A little bit of that is from sovereign debt, not as much as in Portugal or Greece. But then a lot of it is from the baking sector which badly needs recapitalization and an additional element which is a little bit of the news this week, the regions. We already knew they were in trouble but we're getting more and more news how deep in trouble various regions in Spain are and it altogether. I don't think anybody has really computed the total sum, amount that's at stake here but it's a very large amount."

On Tuesday, interest rates on Spanish 10-year bonds spiked to record level of 7.5 percent.

Cabral says the market speculation will deepen Spanish sovereign debt crisis and cause vicious circulation.

SOUNDBITE (ENGLISH) LUIS CABRAL, NYU STERN SCHOOL OF BUSINESS:
"They are not able to sustain a speculative attack by the market, by creditors and winding up having to pay 7 or 8 percent on their debt, then a problem of liquidity becomes a problem of insolvency. That is the problem."
 
Financial analysts predict a 7 percent contraction of the Spanish economy this year.

The country is struggling with debt levels of 165 percent of its overall economic output.

Cabral emphasizes that EU policy makers have to focus on stabilizing the highly volatile financial markets.

SOUNDBITE (ENGLISH) LUIS CABRAL, NYU STERN SCHOOL OF BUSINESS:
"If you're able to quiet down the markets, then I think the Spanish economy will have enough time to recover from this recession and go back to a path of growth. That's one of the reasons why politicians have been trying to gain some time but it's becoming clear that time is coming to an end. As much as the prime minister in Spain says that Spain will not require any additional rescue plan, I don't think it's going to be believed at this point."

Cabral also suggest that the creation of euro bond would bring countries like Spain, Portugal or Italy back on track to recovery.

SOUNDBITE (ENGLISH) LUIS CABRAL, NYU STERN SCHOOL OF BUSINESS:
"If there were a European institution that would hold some sort of Europe-wide bond, that would allow every country to convert a part of their debt, not all of it, let's say, up to 50 or 60 percent of each country's debt. That's more or less the solution that people have been pointing to and make that a European guaranteed bond, that would go a along way towards A) lowering the interest rate paid on a substantial part of the debt for a country like Spain and B) quiet the markets."

Spain has become the recent focus for investors. If Greece were to default or exit the euro zone, the knock-on effects could push Spain and even Italy over the edge.