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The reform comes as Spain faces the full brunt of contagion from chaos in Greece, with mounting fears of a chain-reaction. Nicolas Doisy from Cheuvruex said the Spanish shoe "is about to drop", with an EU-IMF rescue more likely by the day. Authorities cannot allow Spain's crisis to fester. "There will surely be a point in time when the threat to the very existence of the euro will become obvious," he said.

Andrew Roberts from RBS said brinkmanship between Athens and Berlin over Greece's euro membership risks full-fledged conflagration, with Spain in the frontline. "The contagion risks are woefully under-estimated. If Greece is forced out of the euro, it will set off deposit flight across southern Europe. This is becoming very dangerous. They seem to think that Greece is a one-off case but once you create a blueprint for exit, everything changes," he said.

Freiburg professor Lars Feld warned that a Greek exit would reduce monetary union to nothing more than a "fixed-exchange system", inviting an attack on the next country.

Spain has been shut out of capital markets since August and faced disaster in November. The European Central Bank came to the rescue with a €1 trillion lending blitz (LTRO) to banks. These, in turn, bought bonds, covertly propping up the Spanish state. This disguised the problem temporarily but capital flight has continued at a brisk pace.

"We are very worried," said Marchel Alexandrovich from Jefferies. "The ECB needs to start buying Spanish bonds right now because the LTRO money is running out."

The nasty twist is that Spanish banks bought their own country's debt as a place to park money at a profit until they needed it to roll over their own debts. This game has backfired horribly. Yields on 10-year Spanish debt averaged 5pc in the weeks after the second LTRO in late February. They closed Wednesday at 6.01pc, implying a large capital loss. "They may have to crystalise these losses," said Mr Roberts.

Mr Rajoy is moving fast to clean up Spain's banks, which have €300bn of exposure to real estate. He is looking at the possible creation of a "bad bank" to separate toxic debts, belately learning from Ireland. The original plan under the Socialists was to merge insolvent "cajas" or savings banks with stronger banks, dragging down everybody.

Mr Mandy said the ECB should step in with fresh measures to contain the fallout from the Spanish crisis. "They need to do quantitative easing, in tandem with lower haircuts on sovereign collateral," he said.

The crisis is now so serious that the ECB can no longer keep shuffling the risk off onto banks, a policy with toxic side-effects, he said. There is no sign yet that the ECB is willing to play such a role. Bundesbank chief Jens Weidmann said this week that "monetary policy is not a panacea", suggesting that the bank had done all it can.

Spain faces multiple shocks at once. The country is tightening fiscal policy drastically in the midst of recession, with unemployment already at 24.4pc. The risk is a repeat of the self-defeating spiral already seen in Greece, where cuts began earlier. "When the private sector is deleveraging, austerity only serves to worsen public finances, with tax revenues falling even faster than public spending," said Karen Guinand from Lombard Odier.