The bailout package for Spain’s banks wasn’t big or comprehensive enough to boost confidence among private investors, as Monday’s market reaction demonstrated, Mohamed El-Erian, CEO of Pimco, the world’s largest bond fund, says in a column published by CNBC.com.

While the plan to provide up to 100 billion euros ($125 billion) was larger than the range of estimates of the hole in Spanish banks, details of the plan remain unclear and the package failed to break the troublesome link between the weak Spanish banks and deteriorating sovereign creditworthiness, says El-Erian.

Reports that Spanish banks sold some of their government bond holdings were also troubling, he says.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

The selloff in assets in Spain and other countries suggests markets overall are losing confidence in the policy response function, and doing so at a rapidly growing rate, he says. Rather than encouraging the private sector to invest along with the public sector, the granting of official financing is viewed as helping the private sector to disengage, he says.

As seen in the debt crises of emerging countries going back to the 1980s, the more the private sector loses confidence in policy makers, the harder it is for policy response to stabilize the situation, much less get in front of it, he says.

This unfortunate reality means governments must move quickly to implement policy responses that are more comprehensive in addressing the problems, he says. Policymakers must also refrain from their insistence that there is no "Plan B," as the absence of clarity on alternate plans only increases the private sector deleveraging and extends the contagion.

European policymakers, particularly the leaders of the big four countries (France, Germany, Italy and Spain), due to meet before the big summit at the end of June, should carefully consider the market reaction on Monday, he says. They should prepare to make the difficult decisions now, not just about individual countries but also "about the composition and functioning" of the eurozone as a whole.

"There is still time for policy makers to gain control,’’ he writes, "but not much.’’

Three Federal Reserve policymakers on Monday, meanwhile, offered some praise for the Spanish bailout while warning that much yet needs to be done to avoid spillover to global markets, Reuters reported.

The European deal "is good news and it alleviates slightly some of the concerns. Nonetheless there are many issues that Europeans are going to face," Reuters quoted Atlanta Federal Reserve Bank President Dennis Lockhart as saying at a conference in Chicago.

"The European sovereign debt crisis threatens banks in that continent, and, by extension, elsewhere," said John Williams, president of the San Francisco Federal Reserve, Reuters reported. "Clearly, it represents a significant threat to financial stability," he said at a separate conference sponsored by his regional Fed bank.

"The European situation is one that we're monitoring very closely, and it does give one pause about what it means for the U.S. economy and the global economy," Charles Evans, head of the Chicago Fed bank, said.

Fed Chairman Ben Bernanke last week said the Fed was ready to act to protect the U.S. economy if the European crisis deteriorates.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown