For financial markets the doomsday scenario in 2011 starts with Spain buckling under its debt and unleashing a Europe-wide crisis that dwarfs anything seen so far in Greece or Ireland.

A man walks past the reflection of an electronic board displaying figures of Madrid\'s Stock Exchange in 2010.

Financial analysts disagree on the likelihood of such a Spanish sovereign debt crisis but they agree the risk is real and that existing European and international rescue mechanisms would be unable to cope.

In part to avert just such an outcome, Prime Minister Jose Luis Rodriguez Zapatero\'s Socialist government is slashing spending to lower the public deficit from 11.1 percent in 2009 to 3.0 percent in 2013.

He vowed in an end-of-year address Thursday to meet his targets. And many in the markets believe the plan is credible, especially coupled with announced sales of big stakes in the national lottery and airport operator.

Spain\'s government has repeatedly stressed that the accumulated public debt is below the European Union limit of 60 percent of annual output, or gross domestic product. It rose to 57.7 percent of GDP at the end of September from 53.2 percent at the end of 2009.

But the big concern for 2011 is that as investors get nervous about Spain they demand higher and higher returns in order to lend money both to the government and private sector.

At a certain point, the rates could get so high that Spain might decide it is no longer worth seeking financing from the market.

Spain\'s central and regional governments and its banks need to raise about 290 billion euros in gross debt on the markets in 2011, including rolling over existing debt, raising their exposure to "funding stress", Moody\'s Investors Service said this month.

If the 10-year interest rate on Spanish debt was to exceed 6 or 6.5 percent, it would become impossible for Spain to stabilise its public debt ratio in the future, Patrick Artus, analyst with French financial services group Natixis, said in a December report.

At the last 10-year bond sale on December 16, Spain\'s government paid a return of 5.446 percent.

"It is therefore reasonable to think that if investors turn pessimistic on Spain as we believe they will and if long-term interest rates exceed this threshold Spain will have to, like Greece and Ireland, ask for support from other European countries and from the IMF," he said.

Natixis believed this aid would have to be forthcoming because of Spain\'s weight in the European Union -- its economy is twice the size of Greece, Ireland and Portugal combined -- and because of the massive amount of Spanish public debt held by European banks.

Underlying the market concerns, Artus cited problems at Spanish banks that loaned heavily in the now collapsed property bubble, an economy with a 20-percent jobless rate and zero growth in the third quarter, and the difficulty of reducing the fiscal deficit.

"The fate of the European Union seems to depend critically on Spain," said Paolo Mameli, analyst at Italy\'s Banca Imi.

Any bailout for Portugal would be entirely manageable with the European mechanism set up in May, he said.

"However, an effective speculative attack on Spain would be a different matter," Mameli said, arguing that funds available would be insufficient for a bailout.

"It therefore seems that Spain represents a sort of Maginot Line for European monetary union."

Banca Imi believed, however, that Spain was set for economic growth, albeit tepid, in 2011. "The worst may well be over, even in Spain, and even in the most crucial areas -- employment and the property market," he added.

Tullia Bucco, analyst at Unicredit Bank Milan, said markets were concerned about Spanish banks\' exposure to the declining property market and their holdings of government debt.

But "the fault line in this vicious circle is that the Spanish government is solvent in spite of a sizeable debt deterioration of both its structural primary balance and growth outlook in the aftermath of the financial crisis."

Moreover, Bucco said banks\' solvency positions had improved after a wave of mergers promoted by the Bank of Spain -- there are now 17 savings banks or groups of savings banks instead of 45.

Unicredit estimated the government would have to spend 56 billion euros if it wanted to strengthen banks\' balance sheets so that Tier One capital such as stocks and reserves rose to 8.5 percent of total assets. In a worst-case scenario where property loans collapsed, the recapitalisation costs would rise to 100 billion euros.

The situation was therefore manageable, it said, especially taking into account that the Spanish bank recapitalisation fund amounted to 90 billion dollars.

"This finding supports our view that Spain won\'t need to ask for financial help," Bucco said.