This week, Spain's government did something extraordinary and dangerous – yet factually correct. Ministers admitted that their banks are in such severe trouble they'll require a bigger cash injection than Madrid can stump up. This is the point that many observers of the euro crisis have been waiting for: the call for some kind of cross-border bank aid that could mean Germany and others handing over tens, if not hundreds, of billions in euros to Spain and others – largely to prop up their banks.

On the one hand, this is an extraordinary cry of desperation by a government that now freely admits it is all but locked out of financial markets, with lenders only willing to give it a loan at punitive interest rates. On the other, it is an admission of the truth – one that Spain, like so many other countries, has tried over the past couple of years to play down. But in finally admitting that its banking problem is too big for it to handle alone, Mariano Rajoy's government has thrown open the door to a whole bunch of concerns and questions: whether Spain will have to ask for what is commonly called a bailout (but is more accurately a giant loan) from the rest of the eurozone; whether the other governments in the single-currency club have the financial or political capital to extend that lifeline; and, crucially, whether all this can be done before the bank jog visible across the southern eurozone turns into a full-on bank run with Northern Rock-style queues outside the cajas of Andalucía.

Before getting to those questions, though, it is worth saying this: at last, the leaders of the eurozone are talking about the issue that really matters – the existential threat to the single currency. Forget austerity, fiscal unions, and inflation regimes at the European Central Bank: with the large exception of Greece, the euro meltdown is primarily about how governments handle the wreckage in their financial sectors. Sure, other factors played a part – such as the vicious wage deflation in Germany that effectively priced southern Europe out of world markets – but the fundamental euro issue can best be summed up by twisting the old Clintonism: it's the banks, stupid. Not just insolvent banks in Spain or Ireland, either, but the bigger institutions that lent to them and throughout the go-go markets of peripheral euroland. Admit that, and you see how the mild austerity imposed in Spain is the wrong solution, especially when combined with the relaxed approach to restructuring its bust banking sector, encouraging them to admit to bad loans (with numbers that always looked suspect), to merge and to bring in old politicians as bosses. Just as in Ireland, the web of connections between the elite financiers and good-ol'-boy politicos helped fuel the boom and inevitably made sorting out the bust more complex, expensive and ultimately ineffective.

Admitting the root cause of the euro's problems does not guarantee a decent solution. There are two major issues here: one financial, the other political. At over 10% of the entire eurozone, Spain's economy is almost twice as big as Greece, Portugal and Ireland put together. Estimates of how much it would cost to recapitalise the country's banking sector easily reach €100bn – or about 10% of the country's GDP. Madrid cannot raise such amounts, and so far there is little sign of the ECB accepting any workarounds. Nor is the rest of Europe ready with the cash. The Irish, who have ruined themselves to bail out their banks, would not take kindly to a country in an analogous situation being given a card to get out of debtors' jail for free.

All this matters to Britain too. If it doesn't do so today, the Bank of England will soon cut its key interest rate further and pump some more quantitative-easing billions into the economy. But visible on the horizon is a much more alarming prospect: that soon David Cameron will have to funnel more cash into the UK's banks. This is a prospect that few talk about – except in code. But the longer the euro crisis drags on, and the bigger it grows, the closer that prospect looms.

• The following footnote was added to this article on 10 June 2012: While this editorial refers to the phrase "it's the banks, stupid" as a twist on "the old Clintonism", to clarify, it was not Bill Clinton but his campaign manager in the 1992 presidential election, James Carville, who came up with the slogan "it's the economy, stupid". The phrase, minus the word "it's", appeared on a sign aimed at workers in Clinton's campaign headquarters, and became an unofficial slogan for the campaign.